How does the amortization of the discount on a note payable affect the elements of a company's financial statements?
A)Decreases interest expense and decreases liabilities
B)Decreases interest expense and increases liabilities
C)Increases interest expense and decreases liabilities
D)Increases interest expense and increases liabilities

Question

Quizplus · Accepted Answer

The bookkeeping technique of converting the discount to interest expense over the term of the loan is described as amortizing the discount.Amortizing the discount increases liabilities (by decreasing the discount on notes payable,a contra liability account)and decreases stockholders' equity (retained earnings).It increases expenses (interest expense),which decreases net income.

How Does the Amortization of the Discount on a Note