Mastertack Inc. bought an asset and signed a four-year non-interest-bearing note for the full amount. If the note were recorded at its face value, which of the following statements would be true?
A) Both assets and liabilities will be overstated
B) Both assets and liabilities will be understated
C) Only liabilities will be overstated
D) Only liabilities will be understated

Question

Quizplus · Accepted Answer

Recording the note at its face value ignores the interest component, leading to an overstatement of both the asset purchased and the liability (the note) because the present value of the note (what it's actually worth today) is less than its face value.