1. For each item, state whether it should be classifed as a current liability on
ID: 2373386 • Letter: 1
Question
1. For each item, state whether it should be classifed as a current liability on the December 31, 2011, balance sheet. Assume that the operating cycle is short than one year. If the item should not be classified as a current liablilty, indicate where on the balance sheet it should be presented.
2. For each item identified as a current liability in part (1), State the account title that is normally used to report the item on the balance sheet.
3. Why would an investor or a creditor be interested in whether an item is a current or long-term liability?
The Following items represnt liablilities on a firm's balance sheets:
a. An amount of money owed to a supplier based on the terms 2/20, n/40, for which no note was executed.
b. an amount of money owed to a creditor on a note due April 30th 2011.
c. an amount of money owed to a creditor on a note due august 15th, 2012.
d. an amount of money owed to emplees for the work performed during the last week in Dec.
e. an amount of money owed to a bank for the use of borrowed funds due on march 1 2011
f. An amount of money owed to a creditor as an annual installment pauyment on a ten-year note.
g. an amount of money owed to the federal government based on the companys annual income.
Explanation / Answer
1. and 2.
Classification Account Title
a. Current liability Accounts Payable
b. Current liability Notes Payable
c. Long-term liability Notes Payable
d. Current liability Wages Payable
e. Current liability Interest Payable
f. Current liability Current Portion of Long-Term Debt
and
Long-term liability Long-Term Debt
g. Current liability Taxes Payable
3. Investors are interested in this information because it enables them to better predict the timing of future cash flows. Items that are classified as current liabilities require the use of current assets to satisfy them, whereas long-term liabilities do not.
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