Question

Sierra Corporation signed a three-month note payable in the amount of $5,000 on October 1. The note requires Sierra to pay interest at an annual rate of 12%. What is the impact on the financial statements before the interest payment?

A) Increase in Liabilities, Decrease in Equity
B) Increase in Assets, Increase in Liabilities
C) Increase in Liabilities, Increase in Equity
D) No Effect on Assets, No Effect on Equity

Answer 1

The impact on the financial statements before the interest payment is an increase in Liabilities and a decrease in Equity.

Step-by-step explanation:

The impact on the financial statements before the interest payment is an increase in Liabilities and a decrease in Equity (Option A).

When Sierra Corporation signed the note payable, it created a liability on its balance sheet. This increased the liabilities of the company. At the same time, there is no impact on the company's assets, so there is no increase in assets or equity.