Question

On December 31, 2020, SoBou Co. has $5,000,000 of short-term notes payable due on February 14, 2021. On January 10, 2021, SoBou arranged a line of credit with Suntrust Bank, which allows SoBou to borrow up to $3,500,000 at one percent above the prime rate for three years. On February 3, 2021, SoBou borrowed $3,500,000 from Suntrust and used $500,000 additional cash to liquidate $4,000,000 of the short-term notes payable. The amount of the short-term notes payable that should be reported as a current liability on the December 31, 2020 balance sheet which is issued on March 2, 2021 is

$5,000,000.

$500,000.

$4,000,000.

$0.

Answer 1

Answer: Option-(a): $5,000,000 Reason: It is given that as on December 31, 2020, SoBou Co. has $5,000,000 of short-term notes payable due on February 14, 2021. It means that entire $5,000,000 of notes payable falls due within one year from the last day of reporting period of Dec. 31, 2020. Financial statements of a company or a firm consists of Balance sheet as at the last day of the reporting period, Income statement & Statement of cash flows for the reporting period and Notes to accounts thereon. Income statement explains operating results of the company achieved during the reporting period in terms of net income or net loss for the period. Balance sheet explains financial position of the company as at last day of the reporting period in terms of net assets held & net liabilities owed by the company. The difference between total net assets and total net liabilities is the networth of the company. On a firm's balance sheet, liabilities block contains details about amount owed by firm to various stakeholders such as vendors, bankers, other financial institutions, general public, tax authorities, etc. Liabilities are cetegorized into current liabilities and long- -term liabilities based on their duration (or period within which they shall be settled). Those liabilities that are to be paid off within one year from the last day of reporting period are classified as current liabilities, otherwise, they are classified as long-term liabilities. In simple words, liabilities that fall due immediately within one year from the last day of reporting period are current liabilities. In the subsequent date, whether firm settles the liability on time or not doesn't affect the charecteristic of a current liability reportable on last day of the current reporting period. Therefore, entire $5,000,000 shall be reported as current liability and so Option-(a) is correct.