Houston Co.borrowed $20,000 from Dallas Co.on March 1,2016.Houston is to repay the principal and interest on March 1,2017.The interest rate is 8%.If the year-end adjustment is properly recorded,what will be the effects of the accrual on Houston's 2016 financial statements?

Question

Quizplus · Accepted Answer

Since Houston Co. borrowed $20,000 from Dallas Co. and has not yet made any payments, the interest that has accrued needs to be recorded as an expense on Houston's financial statements for the year. This will increase Houston's interest expense and increase its liabilities to reflect the amount of interest owed to Dallas Co. Therefore, the correct choice is A, which indicates an increase in liabilities and expenses.