Multiple Choice
Which of the following best describes how debt can create financial risk and instability for a company?
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1. Introduction to Accounting
Types of Accounting
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A clothing store credit card is an example of what type of debt?
A
Revolving debt
B
Mortgage debt
C
Secured debt
D
Installment debt
Verified step by step guidance1
Understand the concept of revolving debt: Revolving debt refers to a type of credit that allows the borrower to repeatedly borrow up to a certain limit, repay, and borrow again. Credit cards are a common example of revolving debt.
Compare the characteristics of revolving debt with the other options: Mortgage debt is typically secured by real estate and involves fixed payments over time. Secured debt is backed by collateral, and installment debt involves regular payments over a set period until the loan is fully repaid.
Identify the key feature of a clothing store credit card: It allows the cardholder to make purchases up to a credit limit and repay the balance over time, which aligns with the definition of revolving debt.
Eliminate incorrect options: A clothing store credit card is not secured by collateral (secured debt), does not involve fixed payments over a set term (installment debt), and is not tied to real estate (mortgage debt).
Conclude that the correct answer is revolving debt, as it matches the characteristics of a clothing store credit card.
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