Instructions a Is managements intent enough to support long term classification

Instructions a is managements intent enough to

This preview shows page 47 - 49 out of 54 pages.

Instructions (a) Is management’s intent enough to support long-term classification of the obligation in this situation? (b) Assume that Eshkol Corporation issues $13,000,000 of 10-year debentures to the public in Janu- ary 2008 and that management intends to use the proceeds to liquidate the $11,000,000 debt ma- turing in March 2008. Furthermore, assume that the debt maturing in March 2008 is paid from these proceeds prior to the issuance of the financial statements. Will this have any impact on the balance sheet classification at December 31, 2007? Explain your answer. (c) Assume that Eshkol Corporation issues common stock to the public in January and that man- agement intends to entirely liquidate the $11,000,000 debt maturing in March 2008 with the
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proceeds of this equity securities issue. In light of these events, should the $11,000,000 debt ma- turing in March 2008 be included in current liabilities at December 31, 2007? (d) Assume that Eshkol Corporation, on February 15, 2008, entered into a financing agreement with a commercial bank that permits Eshkol Corporation to borrow at any time through 2009 up to $15,000,000 at the bank’s prime rate of interest. Borrowings under the financing agreement ma- ture three years after the date of the loan. The agreement is not cancelable except for violation of a provision with which compliance is objectively determinable. No violation of any provision exists at the date of issuance of the financial statements. Assume further that the current portion of long-term debt does not mature until August 2008. In addition, management intends to refi- nance the $11,000,000 obligation under the terms of the financial agreement with the bank, which is expected to be financially capable of honoring the agreement. (1)Given these facts, should the $11,000,000 be classified as current on the balance sheet atDecember 31, 2007? (2)Is disclosure of the refinancing method required? CA13-4(Refinancing of Short-Term Debt)Medvedev Inc. issued $10,000,000 of short-term commer-cial paper during the year 2006 to finance construction of a plant. At December 31, 2006, the corporation’syear-end, Medvedev intends to refinance the commercial paper by issuing long-term debt. However, be-cause the corporation temporarily has excess cash, in January 2007 it liquidates $4,000,000 of the com-mercial paper as the paper matures. In February 2007, Medvedev completes an $18,000,000 long-term debtoffering. Later during the month of February, it issues its December 31, 2006, financial statements. Theproceeds of the long-term debt offering are to be used to replenish $4,000,000 in working capital, to pay$6,000,000 of commercial paper as it matures in March 2007, and to pay $8,000,000 of construction costsexpected to be incurred later that year to complete the plant.Instructions(a)How should the $10,000,000 of commercial paper be classified on the December 31, 2006, Janu-ary 31, 2007, and February 28, 2007, balance sheets? Give support for your answer and also con-sider the cash element.(b)What would your answer be if, instead of a refinancing at the date of issuance of the financialstatements, a financing agreement existed at that date?CA13-5(Loss Contingencies)On February 1, 2007, one of the huge storage tanks of Paunee Manu-facturing Company exploded. Windows in houses and other buildings within a one-mile radius of theexplosion were severely damaged, and a number of people were injured. As of February 15, 2007 (whenthe December 31, 2006, financial statements were completed and sent to the publisher for printing andpublic distribution), no suits had been filed or claims asserted against the company as a consequence ofthe explosion. The company fully anticipates that suits will be filed and claims asserted for injuries anddamages. Because the casualty was uninsured and the company considered at fault, Paunee Manufac-turing will have to cover the damages from its own resources.Instructions
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