Purdum Farms borrowed $10 million by signing a five-year note on December 31, 2015. Repayments of the principal are payable annually in installments of $2 million each. Purdum Farms makes the first payment on December 31, 2016 and then prepares its balance sheet. What amount will be reported as current and long-term liabilities, respectively, in connection with the note at December 31, 2016, after the first payment is made?
A)$2 million in current liabilities and $8 million in long-term liabilities.
B)$2 million in current liabilities and $6 million in long-term liabilities.
C)Zero in current liabilities and $8 million in long-term liabilities.
D)Zero in current liabilities and $10 million in long-term liabilities.

Question

Quizplus · Accepted Answer

The payment due in the next year (within 12 months) will be reported as a current liability, while the remaining amount will be reported as a long-term liability. After making the first payment on December 31, 2016, Purdum Farms will have $8 million remaining ($10 million loan - $2 million payment made), which will be reported as a long-term liability. Therefore, the amount reported as current liabilities will be $2 million and the amount reported as long-term liabilities will be $6 million.

Purdum Farms Borrowed $10 Million by Signing a Five-Year Note