During Year 1,Bradley Corporation borrowed $20,000 from Fidelity Bank by signing a one-year,6% discount note.On December 31,Year 2 Bradley failed to make the adjusting entry to accrue the related interest.This error will cause:
A)Net income for Year 1 to be overstated and liabilities for Year 1 to be overstated.
B)Net income for Year 1 to be understated and net income for Year 2 to be overstated.
C)Net income for Year 1 to be understated and liabilities for Year 1 to be overstated.
D)Net income for Year 2 to be understated and liabilities for Year 1 to be understated.

Question

Quizplus · Accepted Answer

The failure to accrue interest at the end of Year 2 means that expenses are understated, causing net income for Year 2 to be overstated. Additionally, liabilities are understated because the interest payable is not recorded.

During Year 1,Bradley Corporation Borrowed $20,000 from Fidelity Bank by Signing