Detailed Answer
(c) The notes payable ($750,000) are due 7/31/Y3,
and would normally be included in 12/31/Y2 current liabilities.
However, a short-term obligation can be reclassified as long-term
if the enterprise intends to refinance the obligation on a longterm
basis and the intent is supported by the ability to refinance.
Largo demonstrated its ability to refinance by actually issuing
$1,500,000 of bonds in February year 3 before the 12/31/Y2
financial statements were issued on 3/3/Y3. The bond proceeds
will be used to retire the note at maturity. The amount excluded
from current liabilities cannot exceed the amount actually refinanced.
Since Largo prepaid $250,000 of the note on 1/12/Y3
with excess cash, that amount must be included in 12/31/Y2
current liabilities. Only the remaining $500,000 can be excluded
from current liabilities.