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Problem 13-10 Subsequent events; classification of debt; loss contingency; financial statement effects [LO13-4, 13-5] Van Rushing...

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?


  

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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.

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