FAR · Select balance sheet accounts · 6 practice questions
Current Portion of Long-Term Debt: The 12-Month Rule
The current portion of long-term debt includes every principal installment due within 12 months after the balance sheet date, not future interest. Use Harbor's semiannual payment schedule below to separate current from noncurrent principal, then try free practice questions.
Try one first
Hint
Focus on what part of the obligation becomes due within one year under the contract, and keep principal separate from future interest.
Answer C. The current portion of long-term debt is the principal that is contractually due within the next 12 months. Unaccrued future interest is not included in the current portion of long-term debt; interest is recognized separately as it accrues. Given the stated installment schedule and absence of refinancing or acceleration, only the September 30, 20X6 principal installment would be classified as current at December 31, 20X5.
Why not A: This reflects the common mistake of reclassifying the whole note once an installment is due soon. For an installment note with no acceleration, refinancing, or breach, only the principal due within the next 12 months is current and the remainder stays noncurrent.
Why not B: This is tempting because candidates often think in terms of the next cash outflow. However, the balance-sheet 'current portion of long-term debt' refers to principal due within one year; unaccrued future interest is not part of that classification (interest payable within 12 months is a separate current liability as it accrues).
Why not D: This confuses management intent with contractual classification. Classification depends on the contract terms and any refinancing or lender actions, not merely management's expectation that the debt will remain outstanding.
Numbers to know
| Classification windowHarbor's balance sheet date is December 31, 20X5. Count principal due through December 31, 20X6. | 12 months |
| Outstanding principalHarbor's year-end balance before splitting the note into current and noncurrent portions. | $1,000,000 |
| Principal per semiannual installmentPayments are due each April 1 and October 1, beginning April 1, 20X6. Interest is paid separately. | $200,000 |
| Installments within the windowBoth April 1, 20X6, and October 1, 20X6, fall within 12 months after year-end. | 2 |
| Current portion2 × $200,000 = $400,000. Counting only the next installment misses half the current principal. | $400,000 |
| Noncurrent portion$1,000,000 − $400,000 = $600,000. This principal is due after the 12-month window. | $600,000 |
| Future interest included in the current portionFuture interest is excluded. Accrued, unpaid interest is reported separately, not as current debt principal. | $0 |
Key points
- Remember: Add every principal payment inside the next 12 months, not just the next payment.
- The note's original term does not determine its current portion.
- If asked for total current liabilities, add accrued interest payable to current principal.
- These examples assume no covenant violations, lender call rights, or refinancing arrangements affecting classification.
How the exam traps you
- Including interest in the current portion of long-term debt. Count principal only. Accrued interest is a separate liability; future interest is not yet accrued.
- Counting only the next installment on a semiannual note. Include both principal installments when both fall within 12 months after year-end.
- Reporting the entire note as current because one installment is due next year. Classify only principal due within the window as current. Keep the remaining principal noncurrent.
Question 2
Hint
Focus on how much principal comes due within 12 months after the balance sheet date, not on the note's original term or total future cash payments.
Answer B. The current portion of long-term debt is the principal amount due within 12 months after the balance sheet date. The first $250,000 installment is due on June 30, Year 2 (within 12 months of Dec. 31, Year 1) and should be classified as current; the remaining $750,000 is due after one year and is noncurrent. Interest already paid through the balance sheet date and unamortized issuance costs are excluded per the problem instructions.
Why not A: This distractor confuses the original term of the debt with current classification. Classification depends on the principal due within the next 12 months, so the $250,000 installment due in June Year 2 must be reported as current.
Why not C: Some candidates add up all scheduled cash payments in the next 12 months, but only principal due is reclassified as the current portion of long-term debt. Only one $250,000 principal installment is payable within the next 12 months.
Why not D: A single principal payment due within 12 months does not make the entire installment loan current; only the portion of principal due within that 12-month period is classified as current.
Question 3
Hint
Focus on how much principal is due within one year of the balance sheet date, not on the original term of the entire note.
Answer A. The portion of principal due within one year of the balance sheet date is a current liability. The next principal payment of $180,000 is due on March 31, 20X6, which falls within one year of December 31, 20X5, so $180,000 is current and the remaining $720,000 is noncurrent.
Why not B: This reflects the mistake of treating the entire note as long-term because its original term is multiple years; however, the portion due within one year must be classified as current.
Why not C: This overstates the current portion by treating the whole balance as current simply because a payment is due next year. Only the amount actually due within one year is current absent contract default or acceleration.
Why not D: This swaps the amounts' classifications; the smaller $180,000 installment is the amount due within one year and therefore is the current portion, not the larger balance.
Question 4
Hint
Focus on principal only and count every scheduled principal payment due within 12 months after the balance sheet date.
Answer A. The current portion of long-term debt is the principal amount due within 12 months after the balance sheet date. From December 31, 20X5, both the April 1, 20X6 and October 1, 20X6 principal payments fall within the next year. Therefore, Harbor should classify $400,000 as current and the remaining $600,000 as noncurrent.
Why not B: This choice reflects the common mistake of counting only the next scheduled installment. It is wrong because the current portion includes all principal payments due within one year of the balance sheet date, and two $200,000 installments are due in that period.
Why not C: This is tempting if a candidate focuses on the note's overall multi-year term and assumes the entire obligation is long-term. That is wrong because classification depends on the amount of principal due within the next 12 months, not just on the original term of the note.
Why not D: This is tempting if a candidate believes that once any payment is due within a year, the entire note becomes current. That is incorrect here because only the portion contractually due within the next 12 months is current; the remainder stays noncurrent.
Question 5
Hint
Separate principal from interest, and focus on what amount of principal must be paid within the next year.
Answer D. The current portion of long-term debt is the principal amount due within the next 12 months. The next principal payment of $200,000 is due on June 30, Year 2, so $200,000 is reported as the current portion; the $30,000 of accrued interest is a separate current liability.
Why not A: This error arises from treating the entire note as noncurrent because of its original 5-year term; however, any principal due within the next year must be reclassified as current.
Why not B: Reporting the full outstanding balance as current is incorrect because only the principal due within the next 12 months is classified as the current portion; the remainder stays noncurrent.
Why not C: This mixes the $200,000 principal due within a year with $30,000 of accrued interest. Interest payable is not included in the 'current portion of long-term debt' but is reported separately.
Question 6
Hint
Focus on what part of the debt principal, not total cash payment, must be paid within 12 months of the balance sheet date.
Answer A. The current portion of long-term debt is the principal amount due within one year of the balance sheet date. The first principal installment of $300,000 is due on July 1, 20X6 (six months after December 31, 20X5), so $300,000 should be classified as a current liability. Interest is reported separately (as interest payable if accrued) and is excluded per the problem statement.
Why not B: This attracts candidates who focus on the note's multi-year term and overlook that a principal installment is due within 12 months. It is incorrect because $300,000 of principal is due within one year and must be classified as current.
Why not C: This option likely adds an interest amount (for example, 8% of $900,000 equals $72,000) to the $300,000 principal. The current portion of the note refers only to principal due within one year; interest is a separate current liability if accrued and is excluded here.
Why not D: This assumes the entire debt is current because a payment is due next year. That is incorrect: only the portion of principal due within the next 12 months is classified as current; the remainder remains noncurrent.
Common questions
What is included in the current portion of long-term debt?
Include all principal contractually due within 12 months after the balance sheet date. For an installment note, count every principal payment in that window.
Does the current portion of long-term debt include interest?
No. Accrued, unpaid interest is a separate current liability, so include it only when the question asks for total current liabilities related to the note.
How do you calculate the current portion of a semiannual note?
Add both principal installments if both fall within the next 12 months. Harbor owes $200,000 on April 1 and October 1, 20X6, so its current portion at December 31, 20X5, is $400,000.
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