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Current vs. Long-Term Liabilities

Raffie's Kids, a nonprofit organization that provides aid to victims of domestic violence, low-income families, and special-needs children, has a 30-year, 5% mortgage on the existing building. The mortgage requires monthly payments of $3,000. Raffie's bookkeeper is preparing financial statements for the board and, in doing so, lists the mortgage balance of $287,000 under current liabilities because the board hopes to be able to pay the mortgage off in full next year. Of the mortgage principal, $20,000 will be paid next year if Raffie's pays according to the mortgage agreement. The board members call you, their trusted CPA, to advise the on how Raffie's Kids should report the mortgage on its balance sheet. What is the ethical issue? Provide your recommendation and discuss the reason for your recommendation.

Solution Preview

On the Balance Sheet is a section under assets entitled Long Term/Fixed Assets. This section belongs to assets which are used over a long period of time, such as the 30 year period noted above in the financing of this asset. Further, the asset is depreciated over the 30 year life which denotes that the value of the asset can be recovered over this period (as depreciation allows) per IRS rules.

Now, if we move this asset into the current asset section of the Balance Sheet, we are effectively over stating current assets, and under stating long term assets, thereby providing a false view of the Balance Sheet, the schedule for paying these assets off, and the essential loss of the depreciation amount for the long ...

Solution Summary

This solution provides a discussion provides on the comparison of current assets with long term assets, and the advantages and disadvantages of how each is classified. It also contains recommendations how to report the mortgage on the balance sheet and ethical issues involved.