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larisa [96]
3 years ago
10

Without an adjusting entry for accrued interest expense, liabilities and interest expense are understated, and net income and st

ockholders' equity are overstated. True or false?
Business
1 answer:
Mrrafil [7]3 years ago
7 0

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 - <em>(this will increase expenses)</em>

Credit Interest payable (liability) account - <em>(this will increase liability)</em>

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.
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