Reference no: EM132718832

Problem 1: Ames, Inc. has $500,000 of notes payable due June 15, Year 6. Ames signed an agreement on December 1, Year 5, to borrow up to $500,000 to refinance the notes payable on a long-term basis with no payments due until Year 7. The financing agreement stipulated that borrowings may not exceed 80% of the value of the collateral Ames was providing. At the date of issuance of the December 31, Year 5, financial statements, the value of the collateral was $600,000 and is not expected to fall below this amount during Year 6. How should the obligation for these notes payable be classified in Ames's December 31, Year 5, balance sheet?

A. Current liabilities of $500,000; long-term liabilities of $0.

B. Current liabilities of $100,000; long-term liabilities of $400,000.

C. Current liabilities of $20,000; long-term liabilities of $480,000.

D. Current liabilities of $0; long-term liabilities of $500,000