Accounts payable vs accrued liabilities: classify current items

Answer A. The caption includes all current liabilities except those explicitly presented separately. Exclude current maturities of long-term debt ($42,000) and unearned revenue/customer deposits ($12,000). Sum the remaining items: $165,000 + $28,000 + $4,500 + $16,000 + $9,000 = $222,500.

Why not B: This answer adds current maturities of long-term debt ($42,000) to the aggregated caption (222,500 + 42,000 = 264,500). The stem, however, states current maturities are shown as a separate line item and therefore must be excluded from the aggregate caption.

Why not C: This answer adds unearned revenue/customer deposits ($12,000) to the aggregated caption (222,500 + 12,000 = 234,500). The stem specifies that customer deposits (unearned revenue) are presented separately and should not be included in the aggregated caption.

Why not D: This answer omits dividends declared but unpaid ($9,000) from the aggregate. The stem only identifies current maturities and unearned revenue as separate line items, so dividends declared are part of the aggregated "Accounts payable and accrued liabilities."

Answer A. A liability is recognized when the company has a present obligation at the balance sheet date. Merely placing an order does not create a payable or accrued liability if no goods have been received and no legal obligation to pay has arisen by year-end. In contrast, salaries earned, utilities consumed, and dividends declared before year-end all create present obligations and are reported as current liabilities.

Why not B: Tempting because no invoice has arrived, but incorrect because the utility services were consumed in December. The company must accrue the expense and the related liability at year-end.

Why not C: Tempting because cash is not paid until the next period, but incorrect because a declared cash dividend creates a present obligation at the declaration date and should be reported as a current liability.

Why not D: Tempting if a candidate focuses on the payment date, but incorrect because the employees have already earned the wages by December 31. That creates an accrued liability at year-end.

Answer B. Current liability classification uses the longer of one year or the normal operating cycle as the benchmark for expected settlement. Because Norton's operating cycle is 15 months, a trade payable due in month 13 will be settled within the operating cycle and should be reported as current. Candidates often err by applying a strict 12-month test instead of using the operating-cycle test.

Why not A: This distractor is tempting because warranties are tied to sales, but classification depends on expected settlement timing, not the sales year. Here, 30% is expected in months 13-18 and Norton's operating cycle is 15 months, so the portion expected to be settled after month 15 (months 16-18) falls outside the operating cycle and should be classified as noncurrent; the company should report only the portion expected to be settled within the 15-month cycle as current.

Why not C: This plays on the familiar 12-month shortcut. However, the correct benchmark is the longer of one year or the operating cycle. Because Norton's operating cycle is 15 months, an obligation expected to be settled in month 14 is within the operating cycle and therefore should be reported as a current liability.

Why not D: Candidates may anchor on the long delivery date, but a deposit refundable on demand means the company could be required to use current assets immediately. That on‑demand feature makes the deposit a current liability despite the long performance horizon.

Answer D. Accounts payable represents routine trade obligations to suppliers for goods or services for which the vendor has billed the company. Because the inventory was received and the vendor invoice was received before year-end, this amount is recorded as accounts payable. The other items are expenses or interest incurred by year-end but are typically recorded as accrued liabilities (e.g., salaries payable, interest payable, accrued utilities) when not yet billed or are not trade payables.

Why not A: Although services were received, no vendor invoice was received by year-end; this cost is typically recorded as an accrued liability (accrued utilities) at year-end rather than accounts payable.

Why not B: Tempting because the amount is owed at year-end and paid soon, but unpaid employee salaries are recorded as an accrued liability (salaries or wages payable), not accounts payable, since they are not trade invoices from a vendor.

Why not C: Interest incurred on debt is recorded as interest payable (an accrued liability) because it arises from a financing arrangement and is not a trade vendor payable, even though it is owed at year-end.

Answer C. Liabilities are recognized when the obligating event occurred and the amount can be measured. Lark received the inventory before year-end, so the obligation to the vendor existed and should be recorded as accounts payable even if the invoice arrives later. Similarly, employees earned wages through December 31, so those unpaid amounts must be accrued as wages payable.

Why not A: This reflects the mistaken belief that a vendor liability cannot exist until an invoice is received. Receipt of the inventory before year-end created the obligation to pay the vendor, so accounts payable should also be recorded.

Why not B: This is tempting if a candidate focuses on the vendor obligation but overlooks the employees' earned wages. Wages earned by employees through December 31 create an accrued liability even though payment occurs in Year 2.

Why not D: This is a cash-basis or paperwork-based error. Under accrual accounting, liabilities are recognized when the obligation exists and can be measured, not when the bill arrives or cash is paid.