Principal and interest that must be paid within the year are examples of which type of obligation?

Principal and interest that must be paid within the year are examples of which type of obligation?

• A. Current liabilities
• B. Long-term liabilities
• C. Contingent liabilities
• D. Deferred liabilities

Answer: (A)

The key idea is how liabilities are classified by when they must be paid. Current liabilities are those obligations expected to be settled within one year (or the operating cycle, if longer). If both the principal and the interest on a loan must be paid within the year, those amounts are due in the near term, so they fall into current liabilities. Long-term liabilities are obligations due after more than one year. Contingent liabilities are potential obligations that depend on uncertain future events, not payments already due. Deferred liabilities aren’t the category for payments due in the near term. So, principal and interest due within the year are current liabilities.

The key idea is how liabilities are classified by when they must be paid. Current liabilities are those obligations expected to be settled within one year (or the operating cycle, if longer). If both the principal and the interest on a loan must be paid within the year, those amounts are due in the near term, so they fall into current liabilities. Long-term liabilities are obligations due after more than one year. Contingent liabilities are potential obligations that depend on uncertain future events, not payments already due. Deferred liabilities aren’t the category for payments due in the near term. So, principal and interest due within the year are current liabilities.