Question

. Question 6 Booth & Co. took out a 5-year, 8%, $100,000 loan on April 1, 2018. Interest payments are due to the bank every March 31st. Assume Booth & Co. uses an annual accounting period and the current accounting period ends on December 31, 2018. What would be the effect on Booth & Co.’s Assets, Liabilities, and Stockholders’ Equity if it did not record the adjusting entry on December 31, 2018 related to the interest on this bank loan?

Answer 1

Answer:

the interest expense using a 360 day year = $100,000 x 8% x 9/12 =  $6,000

This unrecorded interest expense will result in an overstatement of net income, which in turn overstates retained earnings (part of stockholders' equity). It will also understate liabilities since interest payable is a current liability. Assets would not be affected by this mistake.