In the situation described in problem 15, if Lee records the asset and note at $11,800, the overall effect will be
A) A correct acquisition cost and correct interest expense
B) A correct acquisition cost and understated interest expense
C) An understated acquisition cost and understated interest expense
D) An overstated acquisition cost and understated interest expense

Question

Quizplus · Accepted Answer

Recording the asset and note at $11,800, when the actual value is different, would result in an overstated acquisition cost because the recorded amount is higher than it should be. This also leads to understated interest expense because the interest expense is calculated based on the principal amount of the note; if the principal is overstated, the interest calculated will not accurately reflect the true cost of borrowing over time.

In the Situation Described in Problem 15, If Lee Records