Franklin Company Issued a $40,000 Note to the Mercantile Bank

Multiple Choice

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 adjusting entry,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) Increase liabilities and decrease equity by $1,600
D) Decrease equity and increase liabilities by $4,800