CPA Exam — Financial Accounting and Reporting (FAR)

On December 31, Year 1, Kestrel Co. owes a $500,000 note payable due March 1, Year 2. On January 20, Year 2, before its Year 1 financial statements are issued, Kestrel issues $500,000 of five-year bonds and uses the proceeds to repay the note when due. How should the note be reported in Kestrel's December 31, Year 1 balance sheet?

1. AAs a noncurrent liability, with the refinancing disclosedCorrect
2. BAs a current liability, with the refinancing disclosed only
3. CAs a current liability, because it matures within one year
4. DSplit equally between current and noncurrent liabilities

Why: ASC 470-10-45-14 lets a short-term obligation be excluded from current liabilities when, after the balance sheet date but before the statements are issued, the entity actually issues a long-term obligation to refinance it; ASC 470-10-50-4 then requires disclosure of the refinancing. Keeping the note in current liabilities ignores that exception, whether or not the refinancing is disclosed. Nothing in the guidance splits the note into equal halves; the amount excluded is the amount actually refinanced, here all $500,000.

At December 31, Year 1, Aster Co. holds: checking account $45,000; petty cash $500; a three-month U.S. Treasury bill bought December 1 $20,000; a six-month certificate of deposit bought October 1 $30,000; a customer's check postdated January 5, Year 2 $2,000; and a bond sinking fund restricted to retiring bonds in Year 6 $50,000. What should Aster report as cash and cash equivalents?

1. A$67,500
2. B$65,500Correct
3. C$115,500
4. D$95,500

Why: Cash equivalents are short-term, highly liquid investments with original maturities to the holder of three months or less (ASC 305-10-20): $45,000 + $500 + $20,000 = $65,500. The six-month CD fails the three-month test ($95,500 includes it). A postdated check is a receivable, not cash ($67,500 includes it). Cash restricted for retiring long-term debt is excluded from cash and cash equivalents and is generally noncurrent ($115,500 includes it; ASC 210-10-45-4).