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Verona Co. had $500,000 in short-term liabilities at the end of the current year. Verona issued $400,000 of common stock subsequent to the end of the year, but before the financial statements were issued. The proceeds from the stock issue were intended to be used to pay the short-term debt. What amount should Verona report as a short-term liability on its balance sheet at the end of the current year?
a. $400,000
b. $0
c. $100,000
d. $500,000
Answer:C
Choice "c" is correct. Verona Co.'s financial statements have not been issued and the actual amount of the transaction is known. The $400,000 transaction should be included in Verona Co's financial statements and disclosed as a "subsequent event" resulting in a net short term liability amount of $100,000 for the current period. Disclosure is necessary for the financial statements not to be misleading.
The journal entry to record this transaction at the end of the current year would be:
                                         Debit (Dr)             Credit (Cr)
Short-term liability         $ 400,000
Long-term liability                                     $ 400,000
The credit is to long-term liability rather than common stock because Footnote 2 of SFAS No 6, Classification of Short-Term Obligations Expected to Be Refinanced, states "if equity securities have been issued [after the balance sheet date but before the balance sheet is issued], the short-term obligation, although excluded from current liabilities, shall not be included in owners' equity."