Question

You have been asked to review the December 31, 2018, balance sheet for Champion Cleaning. After completing your review, you list the following three items for discussion with your superior:

A) An investment of $32,000 is included in current assets. Management has indicated that it has no intention of liquidating the investment in 2019.
B) A $120,000 note payable is listed as a long-term liability, but you have determined that the note is due in 10, equal annual installments with the first installment due on March 31, 2019.
C) Deferred revenue of $66,000 is included as a current liability even though only two-thirds will be recognized as revenue in 2019, and the other one-third in 2020.

Answer 1

The question addresses the correct classification of an investment, a note payable, and deferred revenue on Champion Cleaning's balance sheet, focusing on the discrepancies between known financial plans and their representation as current or long-term items according to GAAP standards.

Step-by-step explanation:

The question involves a discussion about the classification of certain items on the balance sheet of Champion Cleaning as of December 31, 2018. The items for discussion concern classifications of an investment as a current asset, a note payable as a long-term liability, and deferred revenue as a current liability.

The following points should be considered:

• Investment classification: Typically, an investment that management does not intend to liquidate within one year should not be classified as a current asset.
• Note payable: The portion of the note payable due within the next year should be classified as a current liability rather than a long-term liability.
• Deferred revenue: The portion of the deferred revenue that is expected to be recognized as revenue in the next fiscal year should be classified as a current liability, while the remainder should be classified as a long-term liability.

These points are crucial for the accurate presentation of the financial position in the balance sheet and adhere to generally accepted accounting principles (GAAP).