Question

On November 30, 2018, Master's Co. borrows $500,000 from its bank for five years at an annual interest rate of 10%. According to the terms of the loan, the principal amount will not be due for five years. Interest accrues monthly on the last day of each month, beginning December 31, 2018. With respect to this borrowing, Master's December 31, 2018, balance sheet included only a long-term note payable of $500,000. As a result:

		Liabilities are understated by $12,500 accrued interest payable
		Liabilities are understated by $4,167 accrued interest payable
		The December 31, 2018, financial statements are accurately presented
		Liabilities are understated by $8,333 accrued interest payable

Answer 1

correct option is "B"- Liabilities are understated by $4,167 accrued interest payable

No interest is accrued for the period November 30,2018 - December 31,2018 (1month),as a result Liabilities is understated .This is so because balance sheet does not shows the amount of interest payable accrued as liability at year end .

Interest accrued = principal* rate*n/12

               = 500000*10%*1/12

               = 4167.

The journal entry which is not made as per the data given:

Account title	Debit	credit	since no journal entry is made
Interest expense	4167		equity is overstated as expense is not booked
Interest payable		4167	Liabilities is understated .