In: Accounting
Problem 13-10 Subsequent events; classification of debt; loss contingency; financial statement effects [LO13-4, 13-5]
Van Rushing Hunting Goods’ fiscal year ends on December 31. At
the end of the 2018 fiscal year, the company had notes payable of
$12 million due on February 8, 2019. Rushing sold 2 million shares
of its $0.25 par, common stock on February 3, 2019, for $9 million.
The proceeds from that sale along with $3 million from the
maturation of some 3-month CDs were used to pay the notes payable
on February 8.
Through his attorney, one of Rushing’s construction workers
notified management on January 5, 2019, that he planned to sue the
company for $1 million related to a work-site injury on December
20, 2018. As of December 31, 2018, management had been unaware of
the injury, but reached an agreement on February 23, 2019, to
settle the matter by paying the employee’s medical bills of
$75,000.
Rushing’s financial statements were finalized on March 3,
2019.
Required:
1. What amount(s) if any, related to the
situations described should Rushing report among current
liabilities in its balance sheet at December 31, 2018?
2. What amount(s) if any, related to the
situations described should Rushing report among long-term
liabilities in its balance sheet at December 31, 2018?
3. What amount(s) if any, related to the
situations described should Rushing report among current
liabilities and long-term liabilities in its balance sheet at
December 31, 2018 if the settlement agreement had occurred on March
15, 2019, instead?
4. What amount(s) if any, related to the
situations described should Rushing report among current
liabilities and long-term liabilities in its balance sheet at
December 31, 2018 if the work-site injury had occurred on January
3, 2019, instead?
Answers | ||||||
1 | Current liability | $3,075,000 | ||||
2 | Long-term liability | $9,000,000 | ||||
3 | Current liability | $3,000,000 | ||||
Long term liability | $9,000,000 | |||||
4 | Current liability | $3,000,000 | ||||
Long-term liability | $9,000,000 | |||||
Explanation | ||||||
Portion of the notes payable not refinanced | 3,000,000 | |||||
on a long-term basis through the stock sale | ||||||
Liability for the payment of employee's medical bills | 75,000 | |||||
Total | 3,075,000 | |||||
Normally, short-term debt (payable within a year) is classified as current liabilities. However, when such debt is to be refinanced on a long-term basis, it may be included with long-term liabilities. The narrative indicates that Rushing refinanced $9.0 million of the notes payable on a long-term basis. Thus, Rushing should report that amount among long-term liabilities. The remaining $3.0 million was a current liability at Dec. 31. | ||||||
The $75,000 payment of the employee’s medical bills is a loss contingency as of Dec. 31. Rushing can use the information occurring after the end of the year and before the financial statements are issued (the settlement) to determine appropriate disclosure. That information confirms that payment was probable (certain) and the amount can be at least reasonably estimated (known). | ||||||
A disclosure note also is appropriate. | ||||||
2 | ||||||
Portion of the notes payable refinanced on a long-term basis through the stock sale = $9,000,000 | ||||||
Normally, short-term debt (payable within a year) is classified as current liabilities. However, when such debt is to be refinanced on a long-term basis, it may be included with long-term liabilities. The narrative indicates that Rushing refinanced $9.0 million of the notes payable on a long-term basis. Thus, Rushing should report that amount among long-term liabilities. | ||||||
3 | ||||||
If the settlement agreement had occurred on March 15, 2019, instead, the $75,000 payment of the employee’s medical bills would not have been accrued as either a current or long-term liability because that payment had not been determined to be probable as of the publication of the financial statements. | ||||||
4 | ||||||
If the work-site injury had occurred on January 3, 2019, instead, the $75,000 payment of the employee’s medical bills would not have been accrued as either a current or long-term liability because the cause of the liability had not occurred as of Dec. 31, 2018. Thus, the liability did not exist as of that date. | ||||||