Purdum Farms Borrowed $10 Million by Signing a Five-Year Note

question 97

Multiple Choice

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?

• A)$2 million in current liabilities and $8 million in long-term liabilities.
• B)$2 million in current liabilities and $6 million in long-term liabilities.
• C)Zero in current liabilities and $8 million in long-term liabilities.
• D)Zero in current liabilities and $10 million in long-term liabilities.

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Definitions:

Conversion Costs

The total expenses of direct labor plus the manufacturing overhead required to transform raw materials into completed products.

Ending Inventory

The total value or quantity of goods in stock at the end of an accounting period, reflecting purchases, sales, and adjustments during the period.

Weighted-Average Method

A cost accounting method used to determine the cost of goods sold and ending inventory, calculating an average cost per unit of inventory.

Work in Process

Work in process (WIP) refers to the materials and goods that are partway through the manufacturing process but are not yet complete.