Chapter 11, Problem 1QS

To determine

Concept Introduction

Current Liabilities:

Current Liabilities are the debts or economic obligations that a company owes to its creditors and that have to be settled within one year or within its operating cycle, whichever period is longer.

Operating Cycle:

An operating cycle represents the average period of time that a company takes to acquire inventory, sell the inventory and collect cash from its customers for the inventory sold to them.

To Find:

The items that are normally classified as current liabilities for a company that has a 15-month operating cycle from the options given in the question.

Given Info:

The following items are given for classifying current liabilities (and non-current liabilities) for a company that has a 15-month operating cycle:

1. Portion of long-term note due in 15 months.
2. Note payable maturing in 2 years.
3. Note payable due in 18 months.
4. Note payable due in 11 months.
5. FICA taxes payable.
6. Salaries payable.

Answer to Problem 1QS

Solution:

The following items are normally classified as current liabilities for a company that has a 15-month operating cycle:

1. Portion of long-term note due in 15 months.
2. Note Payable due in 11 months.
3. FICA taxes payable.
4. Salaries payable.

The remaining items that are 'Note Payable maturing in 2 years' and 'Note Payable due in 18 months' are considered as non-current liabilities for a company that has a 15-month operating cycle.

Explanation of Solution

The classification of current and non-current liabilities for a company that has a 15-month operating cycle is explained as follows:

1. Portion of long-term note due in 15 months- This is a current liability because the portion of long-term note is getting due in 15 months which is within the company's 15-month operating cycle.
2. Note payable maturing in 2 years- This is not a current liability because note payable is maturing in 2 years and this is not within the company's 15-month operating cycle.
3. Note payable due in 18 months- This is not a current liability because note payable is getting due in 18 months and this is not within the company's 15-month operating cycle.
4. Note payable due in 11 months- This is a current liability because the note payable is getting due in 11 months which is within the company's 15-month operating cycle.
5. FICA taxes payable- FICA taxes payable is a current liability because a company has to pay FICA taxes to the federal government within few days i.e. within one year or within its operating cycle.
6. Salaries payable- Salaries payable is a current liability because salaries are typically payable by the company in less than one year.

Conclusion

A company's current liabilities have to be settled within one year or within its operating cycle, whichever period is longer. Therefore, a company that has a 15-month operating cycle should consider those items as current liabilities that have to be settled within 15 months.