Multiple Choice
Which type of liability is described as a loan with an asset attached to it that belongs to the lender until the debt is paid?
19
views
9. Current Liabilities
Types of Liabilities
Struggling with Financial Accounting?
Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Which type of liability is best described as a loan agreement allowing the borrower to take out and repay funds based on flexible guidelines?
A
Accounts payable
B
Notes payable
C
Mortgage payable
D
Line of credit
Verified step by step guidance1
Understand the concept of a 'line of credit': A line of credit is a flexible loan arrangement between a borrower and a lender, allowing the borrower to withdraw and repay funds up to a predetermined limit as needed, rather than receiving a lump sum upfront.
Compare the characteristics of a line of credit with other liabilities: Accounts payable refers to amounts owed to suppliers for goods or services received, typically short-term and not flexible. Notes payable are formal written agreements for borrowing a fixed amount, often with a set repayment schedule. Mortgage payable is a long-term liability tied to real estate financing.
Identify the key feature of a line of credit: The flexibility to borrow and repay funds as needed within the agreed limit distinguishes it from other liabilities, which generally have fixed terms and amounts.
Relate the definition to the question: The question describes a loan agreement with flexible borrowing and repayment guidelines, which aligns with the definition of a line of credit.
Conclude that the correct answer is 'line of credit' based on the comparison and the description provided in the question.
Related Videos
Related Practice
Types of Liabilities practice set
Problem sets built by lead tutorsExpert video explanations