ABC Company has a note payable that is due six months after its year end. Under which of the following conditions will ABC be able to classify the note as a long-term debt.
A) ABC cannot classify the note as long term because it is due within the current operating cycle or one year, whichever is longer.
B) ABC can classify the note as long term because it is due next year.
C) ABC can classify the note as long term because management intends to refinance it with long term debt and has an agreement to do so with a qualified creditor.
D) ABC can classify the note as long term because it is a 10 year note and management intends to pay the maturity value at the end of the 10-year period.

Question

Quizplus · Accepted Answer

According to the generally accepted accounting principles (GAAP), a liability can be classified as a long-term debt only if it is not due within the current operating cycle or one year, whichever is longer. However, if management intends to refinance the debt with a qualified creditor before it becomes due and has an agreement to do so, then it can be classified as a long-term debt. Option C satisfies this criterion and is hence the correct choice. Option A is incorrect as it states that the debt cannot be classified as long term without considering the possibility of refinancing. Option B is incorrect as it assumes that the debt is due after one year without considering the operating cycle. Option D is incorrect because management's intention to pay at maturity does not affect the classification of a liability as long term or short term.

ABC Company Has a Note Payable That Is Due Six