Short-Term Liability Classification and Long-Term Debt - Explained

Conditions for Classifying Short-Term Liability as Long-Term Debt

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Question

Which of the following conditions would allow a firm to classify a short-term liability as a long-term debt?

I. The firm has issued a long-term note with the stated purpose of extinguishing the short-term debt when it matures. The note is cancelable if there are violations of certain operating provisions.

II. The firm has entered into a binding agreement with a bank to refinance the short-term debt with a long-term liability.

III. The firm has announced that it will continue to refinance the debt with available credit for the next 2 years.

Answers

Explanations

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A. B. C. D.

Explanation

If these agreements have any provisions for cancellation which are either ambiguous or which have a good probability of being violated, then the short-term debt cannot be classified as a long-term debt. That's why (I) is not a valid choice. (III) is not acceptable since there is no demonstration of credible intent or ability to be able to refinance the debt.

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