Question

6 Van Rushing Hunting Goods' fiscal year ends on December 31. At the end of the 2021 fiscal year, the company had notes payable of $9.7 million due on February 8, 2022. Rushing sold 1.5 million shares of its $0.25 par, common stock on February 3, 2022, for $7.5 million. The proceeds from that sale along with $2.2 million from the maturation of some 3-month CDs were used to pay the notes payable on February 8. 16.7 points Through his attorney, one of Rushing's construction workers notified management on January 5, 2022, that he planned to sue the company for $1 million related to a work-site injury on December 20, 2021. As of December 31, 2021, management had been unaware of the injury, but reached an agreement on February 23, 2022, to settle the matter by paying the employee's medical bills of $76,500. eBook Print Rushing's financial statements were finalized on March 3, 2022. References 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, 2021? 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, 2021? 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, 2021 if the settlement agreement had occurred on March 15, 2022, 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, 2021 if the work-site injury had occurred on January 3, 2022, instead? (For all requirements, enter your answers in whole dollars.)

Answer 1

(1) Current Liability :- $ 2,276,500

(2) Long term Liability :- $7,500,000

(3) Current Liability :-$ 2,200,000

Long term Liability :- $7,500,000

(4 ) Current Liability :- $2,200,000

Long term Liability :- $7,500,000

Explanation and Calculations :-

(1) Current Liability :- $ 2,276,500

Portion of the notes payable not refinanced on a long term basis through the stock sale = $2,200,000

Liability for the payment of employee's medical bills = $ 76,500

Total = $ 2,276,500

Short term debt which are payable within a year is a current liability.But,when a short term debt is refinanced on a long term basis it becomes a long term Liability. Here, Rushing refinanced $ 7.5 million of the notes payable on a long term basis so it will be reported as long term Liability .The rest $ 2.2 million will be current liability at December 31 . An amount of $76,500 is paid to employee for his medical bills. It is a loss contingency as of December 31.

(2) Long - term Liability = $ 7,500,000

Portion of the notes payable refinanced on long term basis ( sale of stock ) = $ 7,500,000

A short term debt which is refinanced on a long term basis will become long term Liabilities.

Rushing refinanced $ 7.5 million of the notes payable on Long term basis , So , $7.5 million will be reported as long - term Liabilities.

(3) Current Liability = $ 2,200,000

Long - term Liability = $ 7,500,000

Suppose , settlement agreement has happened on March 15 ,2022 then , $ 76,500 which is the payment of the employee's medical bills will not have been accrued as current or Long term Liability . The reason is that the payment had not been recognised as probable one as of the issuance of financial statements.

(4) Current Liability = $2,200,000

Long - term Liability = $7,500,000

Suppose ,the work site injury was occurred on January 3 ,2022 ,then $ 76,500 which is the payment of employee's medical bills will not have been accrued as current or Long term Liability, The reason is that the liability had not occurred as of December 31 ,2021 .Hence, as of the date liability didn't exist.