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 $36,000 is included in current assets. Management has indicated that it has no intention of liquidating the investment in 2022. A $160,000 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 $78,000 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".)

Answer 1

Answer:

Investment of 36,000 - long-term asset

16,000 note payable - current liability

144,000 note payable - non-current liability

Deferred revenue of 52,000 - current liability

Deferred revenue of 26,000 - non-current liability

Explanation:

For the investment amounting to 36,000, it should belong to the long-term asset since the management has no intention of liquidating it next year. For the note payable, only the amount maturing next year should be classified in the current liability.

The excess amount of the note payable should be classified in the long-term liability since its maturity amount will be paid for the next years to follow.

The deferred revenue amounting to 78,000 should be partly current liability and partly non-current liability since only two-thirds of it will be recognized next year and the other one-third will be recognized in the following years.