On January 1,Needem,Inc.borrows $10,000 and agrees to repay the loan plus 8% interest in two years.If the proper adjustment is not made at the end of the first year,what will be wrong with the financial statements?

Question

Quizplus · Accepted Answer

If the proper adjustment is not made at the end of the first year, the interest expense of 8% for the first year will not be recorded, resulting in an understatement of liabilities on the balance sheet. This is because the company has an obligation to repay both the principal and interest on the loan, and the interest that has accrued but not yet been paid is a liability. Therefore, choice D is correct.