Jason Manufacturing has been planning an expansion of its manufacturing facilities. As a result, in year 1, it obtained a $2 million longterm loan from First Bank. According to the debt agreement between the two parties, Jason Manufacturing is required to maintain a current ratio of 2:1 or greater. At yearend, the controller concluded that the current ratio was only 1:1, and, therefore, Jason was in violation of the debt agreement, requiring the loan to be paid to First Bank within six months.

Since Jason was unable to obtain any concessions from First Bank, Jason reclassified the longterm debt as a current liability. However, within the first three months of the next year, Jason has been able to correct the debt agreement violation and restore the current ratio to 2.2:1, which is acceptable to First Bank. Therefore, the debt does not have to be repaid early.

In preparing year 2s financial statements, the controller is perplexed as to how to classify the debtshort term or long term? As controller, your assistance is necessary to settle the issue.

Required: Utilize the FASB Codification to determine the proper classification of the debt in both year 1 and year2. Make sure specific Codification references are included in your answer.