Question

On December 31, 2019, Yel Co. has €3,000,000 of short-term notes payable due on February 14, 2020. On January 10, 2020, Yel arranged a line of credit with ROY Bank which allows Irey to borrow up to €2,000,000 at one percent above the prime rate for three years. On February 2, 2020, Irey borrowed €1,800,000 from ROY Bank and used €750,000 additional cash to liquidate €2,550,000 of the short-term notes payable. The amount of the short-term notes payable that should be reported as current liabilities on the December 31, 2019 statement of financial position which is issued on March 15, 2020 is

Select one:

a. €750,000.

b. None of these answers.

c. €1,800,000.

d. €1,200,000.

e. €2,550,000

Answer 1

Given short term notes payable = €3,000,000

Total amount used to liquidate short term notes = €2,550,000

Balance = €3,000,000 - €2,550,000 = €450,000

The additional €2,000,000 which is borrowed from ROY Bank will not increase the short term notes payable because it's a long term credit being payable in three years.

The additional €750,000 cash used will now be added to the balance amount

Amount to be reported as current liabilities = €450,000 + €750,000 = €1,200,000

Answer is option (d) €1,200,000