Question

You have been asked to review the December 31, 2021, balance sheet for Champion Cleaning. After completing your review, you list the following three items for discussion with your superior: An investment of $48,000 is included in current assets. Management has indicated that it has no intention of liquidating the investment in 2022. A $280,000 note payable is listed as a long-term liability, but you have determined that the note is due in 10, equal annual installments with the first installment due on March 31, 2022. Deferred revenue of $114,000 is included as a current liability even though only two-thirds will be recognized as revenue in 2022, and the other one-third in 2023.
Determine the appropriate classification of each of these items. (If no entry is required for classification, choose "No entry":)
Current Long-term
Items Amount Classification Amount Classification
1. Investment
2. Installment note
3. Deferred revenue

Answer 1

Answer:

1. Investment

• Long term investment: $48,000

Since this investment will not be liquidated in the current year, then it must be considered long term.

2. Installment note

• Current portion of long term debt (under current liabilities): $28,000
• Long term debt: $252,000

The amount that will be paid during 2022 must be included as the current portion of a long term liability.

3. Deferred revenue

• Current liabilities: $76,000
• Long term liabilities: $38,000

Any liabilities (including deferred revenue) that are due in more than one year must be reported as long term.