CPA · Question 3 · Area 1: Financial Reporting
A company has a debt covenant requiring a current ratio of at least 2.0. On December 31, Year 1, the company has current assets of $800,000 and current liabilities of $500,000. On January 15, Year 2, before the financial statements are issued, the company refinances $200,000 of its short-term debt into a long-term note due in 5 years. The refinancing agreement is non-cancelable. How should the $200,000 debt be classified on the December 31, Year 1 balance sheet, and is the covenant violated?
Answer options:
Current Liability; Covenant is violated.
Non-current Liability; Covenant is not violated.
Current Liability; Covenant is not violated.
Non-current Liability; Covenant is violated.
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