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shawn20034
shawn20034
25.11.2021 • 
Business

Jettison Manufacturing has been planning an expansion of its manufacturing facilities. As a result, in year 1, it obtained a $2 million long-term loan from National Bank. According to the debt agreement between the two parties, Jettison Manufacturing is required to maintain a current ratio of 2:1 or greater. At year-end, the controller concluded that the current ratio was only 1:1, and, therefore, Jettison was in violation of the debt agreement, requiring the loan to be paid to National Bank within six months. Since Jettison was unable to obtain any concessions form National, Jettison reclassified the longterm debt to a current liability. However, within three months into the next year, Jettison was able to correct the debt agreement violation and restored the current ratio to 2.2:1 which was acceptable to National and therefore the debt was not required to be repaid early. In preparing year 2’s financial statements the controller is perplexed as to how to classify the debt—short term or long-term? As controller your assistance is necessary to settle the issue. Required:
a. According to the FASB Codification, what is the proper classification of the debt in this case?
b. What key words would you utilize in your search?
c. What are the specific Codification references you utilized in preparing your answer?

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