Do companies always reclassify$$ long$-$term debt that becomes callable by the creditor as a$$ short$-$term obligation? Explain.

Question content area bottom

Part $1$

A$.$

$$Typically$,$ these obligations would be reclassified.$$ However, if both of the following conditions are$$ met, then the obligation can continue to be classified as$$ long$-$term: $(1)$ the creditor waives or loses the right to demand$$ payment; and$(2)$ the obligation will not become callable because it is probable that the debtor will address the violation within the grace period. The timing of when the creditor grants a waiver is also important. Under$$ IFRS, a creditor can grant a waiver up to six months after the financial statements have been released to be able to continue to classify the debt as$$ long$-$term.

B$.$

$$Typically$,$ these obligations would be reclassified.$$ However, if one of the following conditions is$$ met, then the obligation can continue to be classified as$$ long$-$term: $(1)$ the creditor waives or loses the right to demand$$ payment; or$(2)$ the obligation will not become callable because it is probable that the debtor will address the violation within the grace period. The timing of when the creditor grants a waiver is also important. Under U$.$S$.$ GAAP, a creditor can grant a waiver until the time the financial statements are released to be able to continue to classify the debt as$$ long$-$term.

C$.$

No$.$ Companies never reclassify$$ long$-$term debt that becomes callable by the creditor as a$$ short$-$term obligation. It will always be classified as$$ long$-$term debt.

D$.$

Yes. Companies always reclassify$$ long$-$term debt that becomes callable by the creditor as a$$ short$-$term obligation.