On September 30, 2011, Print-O-Matic Inc. entered into an arrangement with its bank to borrow $250,000. The principal is due on October 1, 2016, and the note has a stated annual interest rate of 10 percent. Under the borrowing agreement, Print-O-Matic agreed to maintain a compensating balance of $60,000 in non-interest-bearing account. As of December 31, 2011, Print-O-Matic has an additional $225,000 in various savings and checking accounts that earn an annual rate of 6 percent. The controller intends to classify the entire $285,000 in cash as a current asset.
REQUIRED:
a. Do you agree with the classification of the $285,000 of cash as a current asset? Explain your answer.
b. Print-O-Matic reported interest expense associated with this note for the year ended December 31, 2011, in the amount of $6,250 [($250,000 × 10%) × ¼]. Do you agree with this classification? Should any other factors be considered in the interest cost? Explain.