Short-Term Debt Expected to Be Refinanced
Response to the following problem:
The following is the current liability section of Hollo Hardware Company on December 31, 2010:
Accounts payable, trade $50,000
Notes payable, 12%, due February 19, 2011 70,000
Unearned interest and revenue 12,000
Total current liabilities $132,000
On January 15, 2011, Hollo enters into an agreement with the local bank to receive a line of credit for $60,000, available for the next two years with payment due 2 years after the date of the loan. Interest at 1% above the prime rate will be charged quarterly. On February 15, 2011 Hollo borrows the money to refinance the short-term note due in three days.
Required:
1. Does the preceding agreement allow Hollo to exclude any of the short-term note from current liabilities on the December 31, 2010 balance sheet? If so, how much? Explain.
2. Would the result be the same if Hollo borrowed the money on February 26, 2011?