What evidence is necessary to demonstrate the ability to consummate the refinancing of

short-term debt?
Answer: The ability to consummate the refinancing may be demonstrated (i) by actually
refinancing the short-term obligation by issuing a long-term obligation or equity securities after
the date of the balance sheet but before it is issued, or (ii) by entering into a financing agreement
that clearly permits the company to refinance the debt on a long-term basis on terms that are
readily determinable.
Discuss the accounting treatment or disclosure that should be accorded a declared but
unpaid cash dividend, an accumulated but undeclared dividend on cumulative preferred
stock, and a stock dividend distributable
A cash dividend formally authorized by the board of directors would be recorded by a debit to
Retained Earnings and a credit to Dividends Payable. The Dividends Payable account should be
classified as a current liability.
An accumulated but undeclared dividend on cumulative preferred stock is not recorded in the
accounts as a liability until declared by the board, but such arrearages should be disclosed either
by a footnote to the balance sheet or parenthetically in the capital stock section.
A stock dividend distributable, formally authorized and declared by the board, does not appear as
a liability because a stock dividend does not require future outlays of assets or services and is
revocable by the board prior to issuance. Even so, an undistributed stock dividend is generally
reported in the stockholders’ equity section since it represents retained earnings in the process of
transfer to paid-in capital.
Scorcese Inc. is involved in a lawsuit at December 31, 2019. (a) Prepare the December 31
entry assuming it is probable that Scorcese will be liable for $700,000 as a result of this suit.
(b) Prepare the December 31 entry, if any, assuming it is not probable that Scorcese will be
liable for any payment as a result of this suit.
Soluion:

(a) Lawsuit Loss.......................................................................

700,000
Lawsuit Liability......................................................... 700,000

(b) No entry is necessary. The loss is not accrued because it is not probable that
a liability has been incurred at 12/31/14.
Presented below are two independent situations.
1. On January 1, 2017, Simon Company issued $200,000 of 9%, 10-year bonds at par.
Interest is payable quarterly on April 1, July 1, October 1, and January 1.
2. On June 1, 2017, Garfunkel Company issued $100,000 of 12%, 10-year bonds dated
January 1 at par plus accrued interest.
Interest is payable semiannually on July 1 and January 1.
Instructions
For each of these two independent situations, prepare journal entries to record the
following.
(a) The issuance of the bonds.
(b) The payment of interest on July 1.
(c) The accrual of interest on December 31

1. Simon Company:

(a) 1/1/14 Cash...................................................................................

200,000
Bonds Payable......................................................... 200,000

(b) 7/1/14 Interest Expense...............................................................

4,500
($200,000 X 9% X 3/12)
Cash..........................................................................
4,500

(c) 12/31/14 Interest Expense...............................................................

4,500
Interest Payable.......................................................
4,500

2. Garfunkle Company:

(a) 6/1/14 Cash...................................................................................

105,000
Bonds Payable......................................................... 100,000
Interest Expense...................................................... 5,000
($100,000 X 12% X 5/12)

(b) 7/1/14 Interest Expense...............................................................

6,000
Cash..........................................................................
6,000
 ($100,000 X 12% X 6/12)

At December 31, 2019, Burr Corporation owes $500,000 on a note payable due February
15, 2019. (a) If Burr refinances the obligation by issuing a long-term note on February 14
and using the proceeds to pay off the note due February 15, how much of the $500,000
should be reported as a current liability at December 31, 2019? (b) If Burr pays off the note
on February 15, 2020, and then borrows $1,000,000 on a long-term basis on March 1, how
much of the $500,000 should be reported as a current liability at December 31, 2019, the
end of the fiscal year?

(a) Since both criteria are met (intent and ability), none of the
$500,000 would be reported as a current liability. The entire
amount would be reported as a long-term liability.

(b) Because repayment of the note payable required the use of

existing 12/31/14 current assets, the entire $500,000 liability
must be reported as current. (This assumes Burr had not
entered into a long-term agreement prior to issuance.)