North Carolina Building Contractor License Practice Exam

Which of the following would be considered a current liability?

1. Accounts receivable

2. A performance and payment bond

3. Long-term debt

4. Retained earnings

The correct answer is: A performance and payment bond

A performance and payment bond is considered a current liability because it represents a commitment by a contractor to perform work and to ensure that all payments to subcontractors and suppliers are made. This type of bond is typically required before a project starts, and it reflects the obligation to fulfill contractual terms within a short timeframe—usually within one year or the duration of the project. Current liabilities are defined as obligations that are expected to be settled within one year, and since the performance and payment bond is tied to the immediate obligations related to construction projects, it fits that definition perfectly. In contrast, accounts receivable represents money owed to the company, which is an asset rather than a liability. Long-term debt is defined as financial obligations that are due beyond one year, thereby classifying it as a non-current liability. Retained earnings, on the other hand, are part of shareholders' equity and reflect the cumulative profits that have been reinvested in the business rather than paid out as dividends, and thus, it is not categorized as a liability at all.