Question

The controllers of Splish Brothers, Inc. and Marigold Corp. both ask you whether their companies can reclassify short-term obligations as long-term. Here are the facts surrounding both companies’ short-term debt.

Splish Brothers, Inc. On December 31, 2017, Splish Brothers, Inc. has $1,760,000 of short-term debt in the form of notes payable to Michaels State Bank due February 5, 2018. On January 28, 2018, Splish Brothers issued 17,600 shares of common stock at $75 per share. Splish Brothers used the proceeds of $1,320,000 from the stock issuance, along with $572,000 in cash to retire the short-term debt and associated accrued interest on February 5, 2018. Splish Brothers will issue its December 31, 2017 financial statements on February 25, 2018.

Marigold Corp. On December 31, 2017, Marigold Corp. has $2,640,000 of short-term notes payable to Indiana Bank & Trust. The notes are due on January 31, 2018. Marigold retired the notes, along with $176,000 in accrued interest, in full on January 31, 2018. On February 11, 2018, Marigold obtained $3,960,000 in long-term financing from Terre Haute Bank & Trust. The new debt bears interest at 5 percent, with interest payments due annually. Marigold will issue its December 31, 2017 financial statements on February 28, 2018.

Prepare partial balance sheets for Splish Brothers, Inc. and Marigold Corp. at December 31, 2017, showing how both companies’ short-term debt should be presented, including footnote disclosures.

Answer 1

Splish Brothers, Inc.

No, as per Statement of Financial Accounting Standards No. 6 they cannot classify short-term debt which is defined as debt maturing within one year of Statement of Financial Statement as long term.

Marigold Corp.

No, although company have taken a new loan but since the same loan was not refinanced and the nature of the loan and lender too are different same cannot be classified as long-term as per Statement of Financial Accounting Standards No. 6 by FASB