Failure to Make a Necessary Adjusting Entry for Accrued Interest

Multiple Choice

Failure to make a necessary adjusting entry for accrued interest on a note payable would result in which of the following?

A) Liabilities and stockholders' equity would both be understated.
B) Net income would be overstated and assets would be understated.
C) Net income would be understated and liabilities would be understated.
D) Net income and stockholders' equity would be overstated and liabilities would be understateD.The adjusting entry increases interest payable and interest expense, which increases liabilities and decreases both net income and stockholders' equity.Failure to make the entry causes both net income and stockholders' equity to be overstated and liabilities to be understated.