Failure to make a necessary adjusting entry for accrued interest on a note payable would result in which of the following?
A)Liabilities and stockholders' equity would both be understated.
B)Net income would be overstated and assets would be understated.
C)Net income would be understated and liabilities would be understated.
D)Net income and stockholders' equity would be overstated and liabilities would be understated.

Question

Quizplus · Accepted Answer

Failing to record accrued interest on a note payable means interest expense is not recognized, leading to an overstatement of net income (since expenses are understated). This overstatement of net income also causes stockholders' equity to be overstated because retained earnings, a component of stockholders' equity, is directly affected by net income. Additionally, liabilities are understated because the accrued interest that should be recorded as a liability is not recognized.

Failure to Make a Necessary Adjusting Entry for Accrued Interest