Question

If a company forgets to record the journal entry to accrue interest expense, then its net income is too ________ and its liabilities are too ________.

Multiple Choice
A. high; high
B. low; high
C. low; low
D. high; low

Answer 1

If a company forgets to record an accrual for interest expense, its net income is reported as too high and its liabilities are reported as too low, the answer is option D.

Step-by-step explanation:

When a company fails to record the accrual of interest expense, this will lead to both overstating net income and understating liabilities. The reason for this is that expenses that are not recorded do not reduce the net income. Hence, net income is too high. Similarly, by not accruing the interest expense, the company's balance sheet does not reflect the obligation to pay this interest, and as a result, liabilities are too low.

The correct answer to the question is D. high; low.