At the Beginning of the Year,your Company Borrows $20,000 by Signing

question 17

Multiple Choice

At the beginning of the year,your company borrows $20,000 by signing a four-year promissory note that states an annual interest rate of 8% plus principal repayments of $5,000 each year.Interest is paid at the end of the second and fourth quarters,whereas principal payments are due at the end of each year.How does this new promissory note affect the current and non-current liability amounts reported on the classified balance sheet prepared at the end of the first quarter?

• A)Increase current liabilities by $400;increase non-current liabilities by $20,000.
• B)Increase current liabilities by $1,600;increase non-current liabilities by $20,000.
• C)Increase current liabilities by $5,400;increase non-current liabilities by $20,000.
• D)Increase current liabilities by $5,400;increase non-current liabilities by $15,000.

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Definitions:

Break-Even

The financial point where a company's revenues exactly match its expenses, indicating no net profit or loss.

Common Fixed Expenses

Common fixed expenses are costs that remain constant in total regardless of changes in the level of activity or volume, such as rent and salaries, shared across departments or projects.

Net Operating Income

Represents the profit a company generates from its regular business operations, excluding expenses and revenues from non-operating activities.

Salaried Estimator

A professional responsible for assessing project costs, often receiving a fixed regular payment regardless of hours worked.