Franklin Company issued a $40,000 note to the Mercantile Bank on August 1, Year 1. The note carried a one-year term and a 12% rate of interest. How will the adjustment, dated December 31, Year 1, to record accrued interest expense impact the elements of the financial statements?
A. Decrease assets and decrease retained earnings by $2,000
B. Increase liabilities and decrease equity by $2,000
C. Decrease equity and increase liabilities by $4,800
D. Increase liabilities and decrease equity by $1,600
Answer: B
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