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Current Portion of Long Term Debt quiz #1

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  • What is the current portion of long-term debt, and how is it classified on the balance sheet?
    The current portion of long-term debt is the principal amount of a long-term loan that is due within the next year. It is classified as a current liability on the balance sheet.
  • How do companies reclassify the current portion of long-term debt at the end of the year?
    At year-end, companies debit the long-term note payable and credit the current portion of long-term debt to reclassify the amount due within one year from long-term liabilities to current liabilities.
  • How is interest on a long-term note payable calculated and recorded at year-end?
    Interest is calculated by multiplying the outstanding principal by the interest rate for the period. At year-end, the company debits interest expense and credits interest payable for the accrued interest, which is a current liability.
  • Why does the interest expense on a long-term note payable decrease each year when payments are made in installments?
    Interest expense decreases each year because the principal balance declines as installments are paid, so interest is calculated on a lower outstanding amount each year.
  • What journal entry is made when the current portion of long-term debt and accrued interest are paid?
    When paid, the company debits the current portion of long-term debt and interest payable, and credits cash for the total amount paid.
  • Why is it important to distinguish between the current and long-term portions of debt on the balance sheet?
    Distinguishing between current and long-term portions of debt provides a clearer picture of a company's short-term obligations and liquidity, helping users assess the company's ability to meet upcoming payments.
  • What is the current portion of long-term debt and how is it reported on the balance sheet?
    The current portion of long-term debt is the principal amount due within the next year and is reported as a current liability on the balance sheet.
  • What journal entry is made at year-end to reclassify the current portion of long-term debt?
    At year-end, companies debit the long-term note payable and credit the current portion of long-term debt to move the amount due within one year from long-term to current liabilities.
  • How is interest on a long-term note payable calculated and recorded at year-end?
    Interest is calculated by multiplying the outstanding principal by the interest rate for the year, and at year-end, interest expense is debited and interest payable is credited for the accrued amount.
  • Why does the interest expense on a long-term note payable decrease each year when payments are made in installments?
    Interest expense decreases each year because the principal balance declines as installments are paid, so interest is calculated on a lower outstanding amount each year.