Question

The controllers of Shamrock, Inc. and Sheffield 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.

Shamrock, Inc. On December 31, 2017, Shamrock, Inc. has $2,160,000 of short-term debt in the form of notes payable to Michaels State Bank due February 5, 2018. On January 28, 2018, Shamrock issued 21,600 shares of common stock at $75 per share. Shamrock used the proceeds of $1,620,000 from the stock issuance, along with $702,000 in cash to retire the short-term debt and associated accrued interest on February 5, 2018. Shamrock will issue its December 31, 2017 financial statements on February 25, 2018.

Sheffield Corp. On December 31, 2017, Sheffield Corp. has $3,240,000 of short-term notes payable to Indiana Bank & Trust. The notes are due on January 31, 2018. Sheffield retired the notes, along with $216,000 in accrued interest, in full on January 31, 2018. On February 11, 2018, Sheffield obtained $4,860,000 in long-term financing from Terre Haute Bank & Trust. The new debt bears interest at 5 percent, with interest payments due annually. Sheffield will issue its December 31, 2017 financial statements on February 28, 2018.

Prepare partial balance sheets for Shamrock, Inc. and Sheffield Corp. at December 31, 2017, showing how both companies’ short-term debt should be presented. (Enter account name only and do not provide descriptive information.)

Answer 1

Balance Sheet of Shamrock Inc. at December 31, 2017 Equity and Liabilities Short Term Debt Notes payable 2,160,000 Balance Sheet of Sheffield Corp. at December 31, 2017 Equity and Liabilities Short Term Debt Notes payable 3,240,000 Short term obligation would not be classified as long term merely because long term funds have been utilized for paying the liability. The classification would depend on the re-payment period and Note not the source of the payment.