What effects would the accrual of $200 of interest on a note payable have on financial statements?
I. Balance sheet: Liabilities are decreased by $200
II. Income statement: Expenses are increased by $200
III. Balance sheet: Retained earnings are decreased by $200
IV. Balance sheet: Cash assets are decreased by $200
V. Balance sheet: Liabilities are increased by $200
A) I, II and III
B) II, III and V
C) II, IV and V
D) II, III and IV

Question

Quizplus · Accepted Answer

Interest is recorded on the balance sheet as an accrued liability, increasing liabilities by $200, decreasing retained earnings by $200, and adding $200 to expenses on the income statement. Since no cash is spent to pay the note or the interest, cash assets are not affected.

What Effects Would the Accrual of $200 of Interest on a Note