Use the following to answer questions 114-116:Seattle Company issued a $90,000 face value discount note payable to First Federal Bank on September 1, Year 1. The note had a 4% discount rate and a one-year term.What is the effect of the accrual of interest expense on the elements of the financial statements?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.
What will be an ideal response?
A
The adjustment to accrue interest expense will increase liabilities (by decreasing discount on notes payable, a contra liability account) and decrease stockholders' equity (retained earnings). It increases expenses (interest expense), which decreases net income. It does not affect the statement of cash flows.
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