9 **Multiple Choice Question:***At the end of the accounting period, accrued interest on a note payable was $500, but no adjusting entry for interest was made. What effect did this have on the financial statements?*Options:1. Interest Payable was overstated.2. Stockholders’ equity was understated.3. Net income was understated.4. Interest Expense was understated.**Explanation:**This question assesses understanding of the impact of missing adjusting entries on financial statements. When accrued interest is not recorded, certain accounts are affected in terms of accuracy:- **Interest Payable**: This liability account would not be correctly reported. The absence of the accrued interest entry would cause it to be understated, not overstated.- **Stockholders’ equity**: If expenses are understated, net income will be overstated (before accounting for any taxes) and retained earnings will thus be higher, assuming no dividends are paid; this means stockholders' equity might be overstated instead.- **Net income**: The failure to record interest expense means expenses are understated, which leads to an overstatement of net income.- **Interest Expense**: This expense account will be understated because the $500 interest was not recorded.Understanding these adjustments is critical for accurate financial reporting, ensuring liabilities and expenses are correctly stated.

Adjusting entry are those entries which are recorded at the end of the accounting period. These entries are followed by the trial balance of the company. The concept of adjusting entry is based on accrual accounting.The correct answer will be option D. Interest expenses was understated. The reason being, the adjusting entry for accrued interest on note payable is recorded by debiting the interest expenses and crediting the interest payable account. Debiting an expense account shows an increase in the concerned account. In the given scenario, when no adjusting entry will be made, then it would lead to understatement of expenses. Explanation for incorrect answer Option A is incorrect. The reason being, when adjusting entry for accrued interest on note payable is not recorded. It will lead to understatement of interest payable. The reason being, interest payable is a liability and it is credited for the amount of accrued interest. Option B is incorrect. The reason being, stockholder’s equity will be overstated. The reason being, when interest expenses are not recorded, it overstates the net income which overstates the amount of stockholder’s equity. Option C is incorrect. The reason being, net income will be overstated as recording of interest expense will lead to a decrease in the net income and when it is not recorded it led to overstatement of interest expenses.

Business

Accounting

At the end of the accounting period, accrued interest on a note payable was $500, but no adjusting entry for interest was made. What effect did this have on the financial statements? Multiple Choice O Interest Payable was overstated.