Chapter 10, Problem 1STQ

To determine

Find which of the given statement is belongs to the characteristic of liabilities rather than of equity.

Answer to Problem 1STQ

1. a. The obligation matures.
2. b. Interest paid to the provider of the capital is deductible in the determination of taxable income.

Explanation of Solution

Liabilities: The claims creditors have over assets or resources of a company are referred to as liabilities. These are the debt obligations owed by company to creditors. Liabilities are classified on the balance sheet as current liabilities and long-term liabilities.

Owner’s equity: Owner’s equity refers to the right the owners possess over the resources of the business. Revenues and the expenses are the components of the owner’s equity.

1. a. The obligation of liability will matures after certain period but there is no maturity for owners’ equity. Hence, it is correct option.
2. b. Interest paid to the provider of the capital is deductible in the determination of taxable income. Interest paid is a settlement of obligation. Thus, the given statement is a characteristic of liability. Hence, it is correct option.
3. c. The capital providers’ claims are residual in the event of liquidation of the business. It is a characteristic of equity not liability.  Hence, it is incorrect option.
4. d. The capital providers normally have the right to exercise control over business operations. It is a characteristic of equity not liability.  Hence, it is incorrect option.