Without an adjusting entry for accrued interest expense, liabilities and interest expense are understated, and net income and stockholders' equity are overstated. True or false?

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ogundeyiolaide ogundeyiolaide · Answer 1 · 2019-12-27T11:14:06+01:00

Answer:

True

Explanation:

An adjusting entry for accrued interest expense will be recorded as follows in the books of the owing entity.

Debit Interest expenses account - (this will increase expenses)

Credit Interest payable (liability) account - (this will increase liability)

Therefore, without the above adjusting entry

Liabilities will be understated, since the adjusting entry would have increased liability

Interest expenses will be understated, since the adjusting entry would have increased interest expenses
Net Income will be overstated, since a higher interest expense by the adjusting entry would have reduced net income
Stockholders' equity will be overstated, since a higher interest expense by the adjusting entry would have reduced net income which would in turn reduce stockholders' equity.