Multiple Choice
Which of the following best defines 'collateral' in the context of liabilities for potential cosigners?
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9. Current Liabilities
Types of Liabilities
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Which type of liability is most directly associated with an insured purchasing a 15-year level term insurance policy?
A
Long-term liability
B
Deferred tax liability
C
Current liability
D
Contingent liability
Verified step by step guidance1
Understand the concept of liabilities: In financial accounting, liabilities are obligations that a company or individual owes to others. They are classified into categories such as current liabilities, long-term liabilities, deferred tax liabilities, and contingent liabilities.
Analyze the nature of the insurance policy: A 15-year level term insurance policy is a long-term commitment, meaning the insured is purchasing coverage for a period of 15 years. This indicates a long-term financial obligation.
Define long-term liability: Long-term liabilities are obligations that are not due within the current accounting period or within one year. They typically include loans, bonds, or other financial commitments extending beyond one year.
Compare other liability types: Current liabilities are obligations due within one year, deferred tax liabilities arise from temporary differences in tax reporting, and contingent liabilities depend on uncertain future events. None of these align with the nature of a 15-year insurance policy.
Conclude the classification: Based on the characteristics of the insurance policy and the definitions of liability types, the most appropriate classification for this obligation is a long-term liability.
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