On October 1,2018,Master's Co.borrows $500,000 from its bank for five years at an annual interest rate of 10%.According to the terms of the loan,the principal amount will not be due for five years.Interest accrues monthly on the first day of each month,beginning November 1,2018.With respect to this borrowing,Master's December 31,2018,balance sheet included only a long-term note payable of $500,000.As a result:

Question

Quizplus · Accepted Answer

The loan was issued on October 1, and interest accrues monthly on the first day of each month, so by December 31, three months' worth of interest have accrued (November, December, and January). The formula to calculate the monthly interest is:

Principal * Annual Interest Rate / 12 = Monthly Interest
$500,000 * 10% / 12 = $4,167

Therefore, accrued interest payable as of December 31 is $4,167 * 3 = $12,501, which means that liabilities are understated by $8,333 ($12,501 - $4,167). Therefore, the correct answer is C), Liabilities are understated by $8,333 accrued interest payable.