Question

E14-1 (L01) (Classification of Liabilities) Presented below are various account balances of K.D. Lang Inc.

(a) Unamortized premium on bonds payable, of which \(3,000 will be amortized during the next year.

(b) Bank loans payable of a winery, due March 10, 2021. (The product requires aging for 5 years before sale.)

(c) Serial bonds payable, \)1,000,000, of which \(200,000 are due each July 31.

(d) Amounts withheld from employees’ wages for income taxes.

(e) Notes payable due January 15, 2020.

(f) Credit balances in customers’ accounts arising from returns and allowances after collection in full of account.

(g) Bonds payable of \)2,000,000 maturing June 30, 2018.

(h) Overdraft of $1,000 in a bank account. (No other balances are carried at this bank.)

(i) Deposits made by customers who have ordered goods.

Instructions

Indicate whether each of the items above should be classified on December 31, 2017, as a current liability, a long-term liability, or under some other classification. Consider each one independently from all others; that is, do not assume that all of them relate to one particular business. If the classification of some of the items is doubtful, explain why in each case.

Short answer

Item	Classification
(a) Unamortized premium on bonds payable, of which $3,000 will be amortized during the next year.	Non-current liability
(b) Bank loans payable of a winery, due March 10, 2021. (The product requires aging for 5 years before sale.)	Long-term liability
(c) Serial bonds payable, $1,000,000, of which $200,000 are due each July 31.	$200,000 as the current portion of long-term liability and $800,000 as a long-term liability
(d) Amounts withheld from employees’ wages for income taxes.	Current liability
(e) Notes payable due January 15, 2020.	Long-term liability
(f) Credit balances in customers’ accounts arising from returns and allowances after collection in full of account.	Current liability
(g) Bonds payable of $2,000,000 maturing June 30, 2018.	Long-term liability
(h) Overdraft of $1,000 in a bank account. (No other balances are carried at this bank.)	Current liability
(i) Deposits made by customers who have ordered goods.	Current liability

Step-by-step solution

Definition of Liability

Any event that will create the outflow of economic benefits is known as liability. The liability of the business entity is reported in the financial statement known as the balance sheet, under which it is classified as current and non-current.

Classification of liabilities

Current liabilities: The liabilities that are classified as current liabilities will create an outflow of the benefits for the business entity within the operating period.

Non-Current/Long-term liabilities: The liabilities that will be paid by the business entity in the long runor after the current operating period are known as non-current/long-term liabilities.

Current portion of long-term liability: Current portion of long-term liability represents the portion of the long-term liability to be paid within the operating period.