Question

Acme Inc. is a retailer of sporting goods equipment and apparel. Acme’s operations are based in Des Moines, Iowa with retail stores located in the nearby suburbs and throughout Iowa. Acme is actively developing opportunities to expand its operations in the surrounding region, including construction of several new retail stores in North and South Dakota. Acme intends to complete construction and open each of the new stores over the next three years. Acme anticipates incurring significant expenses and making short-term cash outlays during the construction phase of the expansion. As a result of this growing need to obtain new, readily available capital, Acme entered into a three-year revolving line of credit (the “Line of credit”) with its bank on January 1, 2017. The line of credit has a maximum borrowing capacity of $100 million.

Since Acme has not previously used a revolving line of credit, it does not have knowledge of the relevant accounting literature and guidance on how to present the related cash flows in its financial statements. Accordingly, as Acme’s external auditor, management has asked for your assistance in determining the appropriate presentation of the borrowing and payment activity within its statement of cash flows for the year ended December 31, 2017.

Required:

1. Should Acme present the borrowing and payment activity related to its revolving

line of credit as cash flows from operating, investing, or financing activities? (Cite any Codification references that serve as justification for your answer)

2. For each of the following scenarios, on the basis of the specific facts and

circumstances, determine whether Acme should present its borrowing and

payment activity under the Line of credit on a net or gross basis within the financing activities section of its statement of cash flows. (Cite any Codification references that serve as justification for your answer)

Scenario 1:

• The line of credit has a maximum borrowing capacity of $100 million, and

under the terms of the agreement, all draws are considered to be due on

demand.

• On July 15, 2017, Acme drew $60 million on the Line of credit.

• On August 30, 2017, Acme drew an additional $40 million on the Line of credit.

• On September 30, 2017, Acme paid down the draws by $50 million.

• Assume the volume of transactions is considered to be large.

Scenario 2:

• The line of credit has a maximum borrowing capacity of $100 million, and

under the terms of the agreement, specific maturity terms will be negotiated

by Acme and the bank after each draw on the Line of credit.

• On June 15, 2017, Acme drew $60 million, and signed a note to repay the full

amount borrowed by December 15, 2017.

• On September 30, 2017, Acme drew an additional $40 million, and signed a

note to repay the full amount borrowed by December 1, 2018.

• On December 15, 2017, Acme paid $60 million to the bank related to the first

draw.

• Assume the volume of the transactions is considered to be large.

Scenario 3:

• The line of credit has a maximum borrowing capacity of $100 million.

Individual draws on the Line of credit do not contain specific maturity dates, other than the entire amount outstanding under the Line of credit becomes due at the end of the three-year term.

• On June 30, 2017, Acme drew $70 million on the Line of credit.

• On September 30, 2017, Acme drew an additional $15 million on the Line of credit.

• On November 30, 2017, Acme drew the remaining $15 million available under

the Line of credit.

• On December 15, 2017, Acme made a payment of $50 million related to the

outstanding balance.

• Assume the volume of the transactions is considered to be large.

Answer 1