On a balance sheet, which of the following would be classified as a current liability for a construction company?
Correct Answer
B) Accounts payable to subcontractors
Current liabilities are debts due within one year. Accounts payable to subcontractors typically must be paid within 30-60 days, making them current liabilities. Long-term loans and mortgages are non-current liabilities.
Why This Is the Correct Answer
Accounts payable to subcontractors represents money owed to subcontractors for work already completed, which typically must be paid within 30-60 days according to standard payment terms. Current liabilities are defined as obligations that must be settled within one year or the normal operating cycle, whichever is longer. Since subcontractor payments are due in the short term, they clearly fall into the current liability category. This is a critical cash flow item for construction companies as delayed payments can damage subcontractor relationships.
Why the Other Options Are Wrong
Option A: Equipment purchased with a 5-year loan
Equipment purchased with a 5-year loan is classified as a long-term or non-current liability because the repayment period extends beyond one year. Only the portion of the loan payment due within the next 12 months would be considered a current liability.
Option C: Building mortgage with 15 years remaining
A building mortgage with 15 years remaining is a long-term liability since the debt extends far beyond one year. Like the equipment loan, only the principal payments due within the next 12 months would be reclassified as current portion of long-term debt.
Option D: Retained earnings from previous years
Retained earnings represent accumulated profits kept in the business rather than distributed to owners, making it part of owner's equity, not a liability at all. Retained earnings appear in the equity section of the balance sheet, not the liability section.
Memory Technique
Use 'CAPE' - Current liabilities are those you must pay within a year: Credit cards, Accounts payable, Payroll taxes, Equipment payments (current portion only)
Reference Hint
Look up 'Balance Sheet Components' and 'Current vs. Long-term Liabilities' in accounting or business management chapters of your reference materials
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