Formulating your opinion regarding commercial paper

Reference no: EM13141142

A fellow accountant has solicited your opinion regarding the classification of short- term obligations repaid prior to being replaced by a long- term security. Cheshire Foods, Inc., issued $5,000,000 of short-term commercial paper during 2008 to finance construction of a plant. At September 30, 2009, Cheshire's fiscal year-end, the company intends to refinance the commercial paper by issuing long-term bonds. However, because Cheshire temporarily has excess cash, in November 2009 it liquidates $2,000,000 of the commercial paper as the paper matures.

In December 2009, the company completes a $10,000,000 long-term bond issue. Later during December, it issues its September 30, 2009 financial statements. The proceeds of the long- term bond issue are to be used to replenish $2,000,000 in working capital, to pay $3,000,000 of commercial paper as it matures in January 2010, and to pay $5,000,000 of construction costs expected to be incurred later that year to complete the plant.

You initially are hesitant because you don't recall encountering a situation in which short-term obligations were repaid prior to being replaced by a long-term security. However, you are encouraged by remembering that this general topic is covered by an FASB pronouncement to which you have access: "Classification of Obligations Expected to Be Refinanced," Statement of Financial Accounting Standards No. 6 (Stamford, Conn.: FASB, 1975). Also, "Classification of Obligation Repaid Prior to Being Replaced by a Long-Term Security," FASB Interpretation No. 8, addresses this situation specifically.

Required:

1. Formulate your own opinion on the proper treatment for the $5,000,000 commercial paper based on your reading in the text. Explain how you think the item should be reported and give text pages to support your conclusions.

2. Determine how the $5,000,000 of commercial paper should be classified by researching the FASB Codification. Explain the results of your research and cite the appropriate section of the Codification.

Reference no: EM13141142

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