On a balance sheet, which of the following would be classified as a current liability?
Correct Answer
B) Accounts payable due within 30 days
Current liabilities are debts that must be paid within one year. Accounts payable due within 30 days clearly falls into this category.
Why This Is the Correct Answer
Current liabilities are financial obligations that a company must pay within one year or within the normal operating cycle, whichever is longer. Accounts payable due within 30 days represents money owed to suppliers or vendors that must be paid in the short term. Since 30 days is well within the one-year timeframe, this clearly qualifies as a current liability on the balance sheet.
Why the Other Options Are Wrong
Option A: Retained earnings from previous years
Retained earnings represent accumulated profits kept in the business rather than distributed to owners. This is part of owner's equity, not a liability at all, since the company doesn't owe this money to external parties.
Option C: Building mortgage with 15 years remaining
A building mortgage with 15 years remaining is a long-term liability because the debt extends far beyond one year. Only the principal payments due within the next 12 months would be reclassified as current.
Option D: Equipment purchased with a 5-year loan
Equipment purchased with a 5-year loan would be classified as a long-term liability since the repayment period extends beyond one year. Only the portion due within the next 12 months would be considered current.
Memory Technique
Think 'CURRENT = COMING UP' - current liabilities are coming up for payment soon (within a year), while long-term liabilities are far off in the future.
Reference Hint
Look up 'Balance Sheet Components' or 'Current vs Long-term Liabilities' in the accounting/financial management chapter of your contractor reference manual.
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