On October 1, 2013, Beacon Corporation borrowed $10,000 from First Bank by signing a one-year, 6% note. On December 31, 2013 Beacon failed to make the adjusting entry to accrue the related interest. This error will cause:
A)Net income for 2013 to be overstated and liabilities for 2013 to be overstated.
B)Net income for 2013 to be understated and net income for 2014 to be overstated.
C)Net income for 2014 to be understated and liabilities for 2013 to be understated.
D)Net income for 2013 to be understated and liabilities for 2013 to be overstateD.The entry that should have been made would have increased interest expense (decreasing net income) and increased interest payable (increasing liabilities) in 2013. Neglecting to make that entry would understate 2013 liabilities and overstate 2013 net income. It would also cause Beacon to recognize all 12 months of interest expense in 2014 instead of just 9 months, which would cause 2014 net income to be understated.

Question

Quizplus · Accepted Answer

The failure to accrue interest will understate liabilities and overstate net income for 2013. In 2014, the entire interest expense will be recognized, understating net income for that year.

On October 1, 2013, Beacon Corporation Borrowed $10,000 from First