FAR · Select balance sheet accounts · 7 practice questions
Term Debt vs. Revolving Credit Fees: Balance Sheet Presentation
Unamortized term-debt issuance costs reduce the related liability; capitalized revolving-credit facility costs remain a separate asset. Below: compare term debt with undrawn and drawn revolvers, then practice choosing the correct balance sheet presentation.
Try one first
Hint
Treat the term borrowing and the revolving-credit arrangement separately; current GAAP does not present their issuance costs the same way.
Answer D. Under current U.S. GAAP, debt issuance costs associated with a recognized debt liability are presented as a direct deduction from the carrying amount of that debt (contra‑liability). Costs for an undrawn but available revolving credit facility are deferred and presented as an asset while the facility remains available and the costs relate solely to obtaining the financing. Thus, term-note issuance costs reduce the note's carrying amount, and revolver issuance costs are shown as an asset.
Why not A: This reverses the correct treatments. Term-note issuance costs are not assets when the debt is recognized. And an undrawn revolver that remains available does not require immediate expensing of costs that solely relate to obtaining the financing; those costs are deferred as an asset.
Why not B: Tempting if you overgeneralize the rule for recognized debt. The term note is a recognized liability and is reduced by issuance costs, but the undrawn revolving facility has no liability to reduce; its issuance costs are deferred as an asset while the facility remains available.
Why not C: This reflects the older idea of deferring all financing costs. It's wrong for the term note: once debt is recognized, issuance costs are presented as a contra‑liability, not as an asset.
Side by side
| Term debt | Undrawn revolver | Drawn revolver | |
|---|---|---|---|
| Costs compared | Issuing the specific note or bond | Obtaining the overall commitment | Obtaining the overall commitment |
| Recognized borrowing | Yes | No | Yes |
| Unamortized cost presentation | Deduction from related debt (contra-liability) | Separate asset | Separate asset, not netted against draws |
| Amortization period | Related debt's term | Commitment period | Commitment period |
| Current or noncurrent presentation | With the related debt's current and noncurrent portions | Asset classification based on remaining benefit period | Asset classification based on remaining benefit period |
Key points
- Remember: Borrowing under a revolver does not move its commitment costs from assets to a debt deduction.
- Use unamortized balances after required amortization, not the original fees paid.
- If the note is already net of discount, do not subtract that discount again.
- Evaluate costs directly attributable to a specific revolver borrowing separately from costs of the overall commitment.
How the exam traps you
- Netting revolving-facility costs against an outstanding draw. Keep overall commitment costs in a separate asset, even when the revolver is drawn.
- Reporting term-debt issuance costs as a deferred asset. Deduct unamortized costs from the specific note or bond.
- Expensing revolver costs because no amount was borrowed. Keep qualifying capitalized costs as an asset while the facility remains available.
Question 2
Hint
Start with the general presentation rule for bond-related discounts and issuance costs, then ask whether any debt arrangement has a specific exception.
Answer C. Under U.S. GAAP, issuance costs for term debt (such as bonds) are presented as a direct deduction from the carrying amount of the related debt, and bond discounts are recorded as a contra-liability. Costs to obtain an unused revolving credit facility are an exception because no liability exists until the facility is drawn; those fees may be capitalized as an asset and amortized over the arrangement term. Therefore the $24,000 related to the unused line of credit is reported as an asset.
Why not A: This is tempting because the bond discount affects the net carrying amount of debt, but it is a contra-liability (reducing the bonds' carrying amount), not an asset.
Why not B: Candidates may recall that issuance costs are deferred and amortized, which sounds asset-like. However, for term debt such as bonds, unamortized issuance costs are presented as a direct deduction from the related debt liability, not as a separate asset.
Why not D: This overgeneralizes the normal rule. While issuance costs and discounts for term debt are deducted from the liability, fees to obtain an unused line-of-credit are a recognized exception and may be reported as an asset.
Question 3
Hint
Analyze the term loan and the undrawn revolver separately. Focus on both the classification of principal due within 12 months and the presentation of issuance costs for each type of borrowing.
Answer B. Unamortized debt issuance costs related to a specific term loan are presented as a direct deduction from the carrying amount of that debt (a contra-liability). The portion of principal due within 12 months (the $180,000 due June 30, Year 2) is classified as a current liability, with the remainder noncurrent. Fees attributable to an undrawn revolving credit facility are capitalized and presented as an asset rather than deducted from the term loan.
Why not A: This is tempting because the loan has a multiyear maturity and the revolver fees are correctly treated as an asset, but it ignores the required current classification for the $180,000 principal payment due within 12 months. A classified balance sheet must separate the current portion of long-term debt from the remainder.
Why not C: This reflects an outdated intuition that issuance costs are deferred assets; under current GAAP, issuance costs related to a specific debt reduce the carrying amount of that debt rather than being shown as an asset. It is also incorrect to expense undrawn revolver fees; such fees are capitalized and presented as an asset when attributable only to the revolver.
Why not D: This correctly treats the issuance costs for the term loan as a deduction from the related debt and recognizes the current portion, but it misclassifies the revolver fees. Fees for an undrawn line of credit are presented as an asset rather than deducted from a debt liability.
Question 4
Hint
Separate the costs tied to a recorded term debt from the costs tied to an unused credit facility, then think about how each is presented at year-end.
Answer B. Debt issuance costs related to a recognized term note are presented as a direct deduction from the carrying amount of that debt. After one year, the unamortized term-note costs are $96,000 ($120,000 − $24,000 amortization), so the note is reported at $4,904,000. Costs of a revolving line of credit with no amount outstanding are recorded as an asset and amortized over the two-year arrangement, leaving a $15,000 asset at December 31, 20X5 ($30,000 − $15,000 amortization).
Why not A: This is tempting if a candidate thinks all financing costs are recorded as deferred assets. Under current U.S. GAAP, issuance costs for a recognized term debt are presented as a direct deduction from the debt, not as a separate asset; only the undrawn revolving-line fee remains as an asset here.
Why not C: This choice overapplies the netting rule by offsetting the revolving-line fee against the term note. Because no amounts were outstanding on the revolving line at year-end, its unamortized fee is reported as an asset rather than netted against the term debt.
Why not D: This option incorrectly assumes the entire commitment fee should be expensed immediately when unused. The fee is amortized over the two-year commitment; only one year's amortization is recorded by December 31, 20X5, leaving $15,000 capitalized.
Question 5
Hint
Do not assume the same balance sheet presentation applies to every type of borrowing arrangement.
Answer B. Under current U.S. GAAP, debt issuance costs related to a recognized debt liability (such as a term note) are presented as a direct deduction from the carrying amount of that liability. Costs incurred to obtain or maintain a revolving line-of-credit are generally capitalized as a deferred financing asset and amortized over the commitment or when the facility is used. Therefore, Hall should net the $40,000 against the term note payable and present the $12,000 related to the revolving credit as an asset.
Why not A: This reflects the older practice of treating issuance costs as deferred charges. For a recognized term debt, current guidance requires presenting issuance costs as a direct deduction from the related liability, not as an asset.
Why not C: This overapplies the contra-liability presentation. While term-debt issuance costs are deducted from the liability, costs to obtain or maintain a revolving credit facility are typically capitalized as an asset rather than deducted from the line itself.
Why not D: Issuance costs that relate to outstanding financing arrangements are not generally expensed immediately. They are capitalized and amortized, either as a contra-liability for term debt or as a deferred asset for revolving facility costs.
Question 6
Hint
First determine which amounts reduce the carrying amount of an existing debt liability, then ask whether any borrowing-capacity costs relate to a facility rather than to a recorded borrowing.
Answer A. Report the bonds at amortized cost: $8,000,000 face less $210,000 unamortized discount less $50,000 unamortized debt issuance costs = $7,740,000. Add the long-term portion of the term note ($2,000,000 − $400,000 = $1,600,000) to get long-term debt of $9,340,000, with $400,000 shown as the current portion. Costs associated with an unused revolving credit facility are not netted against debt; they are deferred and shown as an asset (other noncurrent asset $24,000).
Why not B: This treats the $50,000 bond issuance costs as a separate noncurrent asset instead of as a deduction from the bond carrying amount; that raises reported long-term debt and (combined with the $24,000 revolver costs) shows $74,000 in assets, which contradicts current GAAP presentation.
Why not C: This nets the $24,000 revolver acquisition costs against debt; costs of obtaining an unused line of credit are deferred as an asset, not deducted from a recorded debt balance, so omitting the separate asset is incorrect.
Why not D: This option fails to subtract the $210,000 unamortized discount from the bonds (it only nets issuance costs), which overstates the carrying amount of the bonds and thus long-term debt.
Question 7
Hint
Treat the term note and the revolving line of credit separately. For the term note, think about everything that reduces carrying amount; for the revolver, ask whether the usual net-against-debt presentation applies.
Answer D. Both the unamortized discount ($30,000) and the unamortized debt issuance costs ($24,000) reduce the carrying amount of the term note measured at amortized cost: $2,000,000 − $30,000 − $24,000 = $1,946,000. Commitment (revolving-credit) fees directly attributable to obtaining a credit facility when no borrowing is outstanding are deferred as an asset and amortized over the commitment period rather than being netted against liabilities or expensed immediately.
Why not A: This option subtracts only the unamortized debt issuance costs (2,000,000 − 24,000 = 1,976,000) and ignores the unamortized discount, and it incorrectly expenses the commitment fees immediately despite the fees being deferred and amortized over the commitment period when directly attributable to obtaining the facility.
Why not B: This correctly treats the commitment fees as an asset, but it subtracts only the unamortized discount (2,000,000 − 30,000 = 1,970,000) and fails to also reduce carrying amount for the unamortized debt issuance costs.
Why not C: While the term note carrying amount is computed correctly here, the classification of the revolver-related commitment fees is incorrect. Such fees are generally presented as a deferred asset and amortized over the commitment term when no borrowing is outstanding, not as a deduction from liabilities.
Common questions
Are revolving line of credit issuance costs an asset?
Capitalized costs of obtaining the overall facility are a separate asset and are amortized over the commitment period. An outstanding draw does not change that presentation.
Are term debt issuance costs an asset or a contra-liability?
Unamortized issuance costs of recognized term debt are a direct deduction from that debt. If a note has a discount, deduct both the unamortized discount and issuance costs.
What if revolving credit fees relate to a specific borrowing?
Evaluate those costs for direct attribution to the recognized borrowing. Qualifying issuance costs attributable to that borrowing reduce its carrying amount, rather than remaining with the overall facility's costs.
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