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 $33,000 is included in current assets. Management has indicated that it has no intention of liquidating the investment in 2022. A $130,000 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 $69,000 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. I need these numbers put into the appropriate classification please.

Answer 1

Solution:

1)

Long-term investment represents the company’s investment that is intended to hold for more than one year. Long-term investment includes stocks, bonds, and cash. It represents as noncurrent asset on the assets side of a company balance sheet.

Whereas, short-term investment represents the company’s investment that is expected to convert into the cash within a year. It represents as current asset on the assets side of a company balance sheet.

Investment is considered as current asset only if it is liquidated within 1 year. Here, the company is not planning for liquidating. Hence, the investment amount of $33,000 is classified as noncurrent asset.

2)

The portion (amount) of the principal of long-term debts that is payable within one year is considered as current portion of long-term debt and is reported as current liability in the balance sheet.

Here, the first instalment of $13,000 of long-term liability is due in 2022. Hence, in 2022 $13,000 is classified as current liability under current portion of long-term liabilities. The remaining amount of $117,000 ($130,000 - $13,000) is classified as long term liability.

3)

Two third of deferred revenue of $69,000 will be earned in 2022 . Hence, $46,000 ($69,000 *2/3) is classified as current liability. The remanining amount of $23,000 ($69,000 - $46,000) is classified as non current liability.

Summarised :

1)The investment of $33,000 is included in noncurrent asset.

2)$13,000 is classified as current liability and $117,000 is classified as long-term liability.

3)$46,000 is classified as current liability.