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Purdum Farms borrowed $10 million by signing a five-year note on December 31, 2015. Repayments of the principal are payable annually in installments of $2 million each. Purdum Farms makes the first payment on December 31, 2016 and then prepares its balance sheet. What amount will be reported as current and long-term liabilities, respectively, in connection with the note at December 31, 2016, after the first payment is made

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Answer:The amount of $2 million will be reported as current liabilities  on 31 December 2017 while the amount of $6 million will be reported as long term liabilities.

Explanation:

Current liabilities are the short term liabilities  expected by businesses  to fund  within a year's time period.

while

Long term liabilities, , are the liabilities which businesses can fund  after a year elapses.

To that effect , The outstanding amount on 31 December 2016 after the first repayment will be

10- 2= $8 million

From  $8 million outstanding, $2 million will be paid on 31 December 2017 which is  within a year.

Therefore,  this amount of $2 million will be reported as a current liability since it is payable within a one year period.

The remaining amount which is

8 - 2 = $6million  will now be reported as a Long term  liability since it would  be payable after more than a year.

The amount of $2 million will be reported as current liabilities on 31 December 2017 while the amount of $6 million will be reported as long term liabilities.

  • Current liabilities are the short term liabilities  expected by businesses  to fund within a year's time period.

While,

  • Long term liabilities, , are the liabilities which businesses can fund  after a year elapses.

To that effect ,

  • The outstanding amount on 31 December 2016 after the first repayment will be:
  • 10- 2= $8 million

From,

$8 million outstanding

$2 million will be paid on 31 December, 2017 which is within a year.

Therefore,

This amount of $2 million will be reported as a current liability since it is payable within a one year period.

The remaining amount ,

8 - 2 = $6million will now be reported as a Long term liability since it would  be payable after more than a year.

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