Question

On August 1, 2020, 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, 2021. How will the note payable and the related interest be classified in the December 31, 2020, balance sheet?

Note Payable Interest Payable
1. Noncurrent liability Current liability
2. Current liability Current liability
3. Noncurrent liability Not shown
4. Current liability Noncurrent liability

Answer 1

Answer:

Current Liability are those liability that are to be repaid within a short period of time, usually within a year. Example Accounts Payable.

Non Current Liability is that liability that is to be repaid in a long period of time, example Bonds Payable.

Notes Payable will be paid on 1 Aug 2021, which is 7 months after 31 Dec 2020 (within a year) and hence will be classified as Current Liability.

Interest Payable is also a current liability.

Correct Answer: Option #2

Notes Payable – Current Liability

Interest Payable – Current Liability

Explanation: