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A bakery must repay $5,000 of its equipment loan during the coming year, with the rest falling due later. Where does that $5,000 belong?
AIn long-term liabilities as a bank loan
BIn fixed assets as bakery equipment
CIn current liabilities as debt due this year
DIn owners' equity as retained earnings
Answer & Solution
Correct answer: C. In current liabilities as debt due this year
1. A long-term loan is split when part of it falls due soon.
2. Any repayment on long-term debt due within the year is the current portion of long-term debt.
3. The current portion sits among the current liabilities, so the $5,000 due this year is listed there.
4. The balance of the equipment loan, which is not due for more than a year, stays in long-term liabilities.
5. Leaving the whole loan in long-term liabilities would understate the claims on the firm's current assets.
6. The equipment itself is a fixed asset, and nothing here touches owners' equity, so those two answers cross the equation.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 14 "Using Financial Information and Accounting", section 14.4 The Balance Sheet_
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