Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

9. Current Liabilities

Types of Liabilities

Financial Accounting

9. Current Liabilities

Types of Liabilities

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Multiple Choice

Which type of liability is created when a company purchases a $500,000 life insurance policy for an employee and names itself as the beneficiary?

Contingent liability

Long-term liability

Current liability

No liability is recognized

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Verified step by step guidance

Understand the nature of the transaction: The company is purchasing a life insurance policy for an employee and naming itself as the beneficiary. This means the company is paying premiums for the policy, but it does not create an obligation to pay a liability to any external party.

Review the definition of a liability: A liability is a present obligation of the company arising from past events, which is expected to result in an outflow of resources (e.g., cash) to settle the obligation.

Analyze the options: A contingent liability arises only if a future event occurs, such as a lawsuit. A long-term liability is a financial obligation due after more than one year, such as bonds payable. A current liability is a financial obligation due within one year, such as accounts payable. None of these apply to the life insurance policy purchase.

Consider the accounting treatment: The payment of life insurance premiums is typically recorded as an expense in the income statement, not as a liability. Since the company is the beneficiary, no liability is created.

Conclude: Based on the analysis, no liability is recognized in this scenario because the transaction does not meet the definition of a liability under financial accounting principles.