Multiple Choice
On which of the following types of bonds is the prospect of default most likely?
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9. Current Liabilities
Types of Liabilities
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Which of the following types of liabilities normally has an associated contra account?
A
Accounts Payable
B
Notes Payable
C
Unearned Revenue
D
Bonds Payable
Verified step by step guidance1
Understand the concept of a contra account: A contra account is an account that is used to reduce the value of a related account. In the context of liabilities, a contra account is typically used to offset or adjust the liability balance.
Review the types of liabilities listed: Accounts Payable, Notes Payable, Unearned Revenue, and Bonds Payable. Consider whether any of these liabilities typically have an associated contra account.
Focus on Bonds Payable: Bonds Payable is a liability account that represents the amount owed by a company for bonds issued. It often has an associated contra account called 'Discount on Bonds Payable' or 'Premium on Bonds Payable,' which adjusts the carrying value of the bonds.
Understand the role of the contra account for Bonds Payable: The 'Discount on Bonds Payable' reduces the carrying amount of the bonds to reflect the fact that they were issued below their face value. Conversely, the 'Premium on Bonds Payable' increases the carrying amount if the bonds were issued above their face value.
Conclude that Bonds Payable is the correct answer because it is the type of liability that typically has an associated contra account to adjust its carrying value.
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