Question

On July 1, 20X0, CriCo takers out a 10%, a $10,000 note payable that is due on July 1, 20X1. No interest is accrued at year-end 20X0. To correct this error in 20X0, you need to record just the adjusting entry that was not made because:

(a) an expense account is involved

(b) no error was made recording the note payable on July 1, 20X0

(c) an accrual is involved rather than a deferral

(d) the books have not been closed

Answer 1

• Accrual concept: We will recognise the expense and incomes as and when incurred and earned rather than on cash basis or receipt basis.
• So, in order to give effect to the accrual concept i.e., accounting is purely done on the basis of accrual concept, we need to recognise the interest liability from July 1, 20x0 to december 31, 20x0.
• This is because, we accrual concept is involved. Therefore, the right answer is option "(C) an accrual is involved rather than a deferral."