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Seattle Company issued a $90,000 face value discount note payable to the First Federal Bank on September 1,2016.The note carried a one-year term and a 4% discount rate.
-As a result of the recognition of interest expense on December 31,2016,
A)liabilities will increase and retained earnings will decrease.
B)assets and liabilities will decrease.
C)assets will increase and retained earnings will increase.
D)liabilities will increase and assets will decrease.

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Seattle Company issued a $90,000 face value discount note payable to the First Federal Bank on September 1,2016.The note carried a one-year term and a 4% discount rate.
-As a result of the recognition of interest expense on December 31,2016,
A)liabilities will increase and retained earnings will decrease.
B)assets and liabilities will decrease.
C)assets will increase and retained earnings will increase.
D)liabilities will increase and assets will decrease.

Quizplus · Accepted Answer

The recognition of interest expense on December 31, 2016, means that the company has used up a portion of the discount, resulting in an increase in liabilities (note payable) and a decrease in retained earnings (due to the recognition of interest expense). Therefore, choice A is the correct answer. Choices B and C are not accurate as they do not reflect the impact of recognition of interest expense on a discount note payable. Choice D is also inaccurate as it implies that the recognition of interest expense will result in a decrease in assets, which is not the case.

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