During Year 1,Bradley Corporation issued a $20,000 face value discount note to Fidelity Bank.The note had a 6% discount rate and a one-year term to maturity.On December 31,Year 1,Bradley failed to make the adjusting entry to accrue the related interest.Which of the following summarizes the effect of this error?

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The adjusting entry that should have been made would have increased liabilities (by decreasing discount on notes payable,a contra liability account)and increased expenses (interest expense),which decreases net income in Year 1.Neglecting to record this entry would understate liabilities at the end of Year 1 and overstate Year 1 net income.The note matures in Year 2.When the entry to record the payment of the note and interest is recorded in Year 2,this error also causes the company to recognize all 12 months of interest expense in Year 2,instead of just 9 months,which causes Year 2 net income to be understated.

During Year 1,Bradley Corporation Issued a $20,000 Face Value Discount