Question

On August 1, 2017, a company borrowed cash and signed a one-year interest-bearing note on which both the face value and interest are payable on August 1, 2018. How will the note payable and the related interest be classified in the December 31, 2017, balance sheet?

Note Payable Interest Payable
Line 1 Current liability Long-term liability
Line 2 Long-term liability Current liability
Line 3 Current liability Current liability
Line 4 Long-term liability Long-term liability

a. Line 4
b. Line 1
c. Line 2
d. Line 3

Answer 1

Answer:

d. Line 3

Explanation:

Generally, the liabilities are classified as current and long term based on their duration, on the date of issue of notes payable the liability is long as the period is of 1 year, whereas generally notes payable are not for 1 year and are termed as short term i.e. current liabilities.

But, on 31 Dec 2017 the period to pay the notes payable and the interest thereon is just of 7 months left, therefore on the balance sheet date both the liabilities will be considered and clarified as Current Liabilities.

Therefore, correct option is

d. Line 3