Choice "B" is correct. Verona Co.'s financial statements have not been issued and the actual amount of the transaction is known. The $400,000 transaction should be included in Verona Co's financial statements and disclosed as a "subsequent event" resulting in a net short term liability amount of $100,000 for the current period. Disclosure is necessary for the financial statements not to be misleading. The journal entry to record this transaction at the end of the current year would be:
| Debit (Dr) | Credit (Cr) |
|---|
| Short-term liability | $ 400,000 | |
| Long-term liability | | $ 400,000 |
The credit is to long-term liability rather than common stock because Footnote 2 of SFAS No 6, Classification of Short-Term Obligations Expected to Be Refinanced, states "if equity securities have been issued [after the balance sheet date but before the balance sheet is issued], the short-term obligation, although excluded from current liabilities, shall not be included in owners' equity."Choices "a", "c", and "d" are incorrect, per the above.
