On
December 31, 2011, Zimmer Corporation has $7.9 million of short term debt in
the form of notes payable that will be due periodically in 2012 to Provincial
Bank. On January 28, 2012, Zimmer enters into a refinancing agreement with the
bank that will permit it to borrow up to 60% of the gross amount of its
accounts receivable. Receivables are expected to range between a low of $5.7
million in May and a high of $7 million in October during the year 2012. The
interest cost of the maturing short-term debt is 15%, and the new agreement
calls for a fluctuating interest rate at 1% above the prime rate on notes due
in 2013. Zimmer's December 31, 2011 balance sheet is issued on February 15,
2012.
Instructions
(a)
Assuming that Zimmer follows private enterprise GAAP, prepare a partial balance
sheet for Zimmer Corporation at December 31, 2011, that shows how its $7.9
million of short-term debt should be presented, including any necessary note
disclosures.
(b)
Assuming that Zimmer follows IFRS, explain how the $7.9 million of short-term
debt should be presented on the December 31, 2011 balance sheet.
(a)
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Zimmer Corporation
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Partial Balance Sheet
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December 31, 2011
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Current liabilities:
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Notes
payable (Note 1)
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$4,480,000
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Long-term debt:
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Notes
payable expected to be
refinanced in 2012 (Note 1)
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3,420,000 |
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Note 1.
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Under a financing
agreement with Provincial Bank the company may borrow up to 60% of the gross
amount of its accounts receivable at an interest cost of 1% above the prime
rate. The company intends to issue notes maturing in 2013 to replace
$3,420,000 of short-term, 15%, notes due periodically in 2012. Because the
amount that can be borrowed may range from $3,420,000* to $4,200,000**, only
$3,420,000 of the $7,900,000 of currently maturing debt has been reclassified
as long-term debt.
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Expected range of receivables:
* Low in May: $5,700,000 X 60% = $3,420,000
** High in October: $7,000,000 X 60% =
$4,200,000
(b) Under
IFRS, since the debt is due within 12 months from the reporting date, it is
classified as a current liability. This classification holds even if a
long-term refinancing has been completed before the financial statements are
released. The only exception accepted for continuing long-term classification
is if, at the balance sheet date, the entity expects to refinance it or roll it
over under an existing agreement for at least 12 months and the decision is
solely at its discretion. The international standard has a stringent
requirement that the agreement must be firm at the balance sheet date.
