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Refinancing of Short-Term Debt and Balance Sheets

Medvedev Inc., issued $10,000,000 of short-term commercial paper during the year 2006 to finance construction of a plant. At December 31, 2006, the corporation's year-end, Medvedev intends to refinance the commercial paper by issuing long-term debt. However, because the corporation temporarily has excess cash, in January 2007 it liquidates $4,000,000 of the commercial paper as the paper matures. In February 2007, Medvedev completes an $18,000,000 long-term debt offering. Later during the month of February, it issues its December 31, 2006, financial statements. The proceeds of the long-term debt offering are to be used to replenish $4,000,000 in working capital, to pay $6,000,000 of commercial paper as it matures in March 2007, and to pay $8,000,000 of construction costs expected to be incurred later that year to complete the plant.

A.)How should the $10,000,000 of commercial paper be classified on the December 31, 2006, January 31, 2007, and February 28, 2007. balance sheets? Give support for your answer and also consider the cash element.

B.)What would your answer be if, instead of a refinancing at the date above of issuance of the financial statements, a financing agreement existed at that date.?

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Instructions A
The commercial paper shall be classified as:
December 31, 2006 $10,000,000 current liabilities. This is so because the refinancing is still NOT final.
January ...

Solution Summary

The solution examines refinancing of short-term debt.