Final answer:
The second interest payment from Wookie Company on December 31st reduces liabilities.
Step-by-step explanation:
The correct answer is A) Reduces liabilities.
When Wookie Company makes an interest payment, it reduces its liabilities because it is paying off a portion of its debt. Liabilities represent the company's obligations or debts to others, and reducing them is beneficial for the company.
For example, if Wookie Company had a loan of $10,000 with an interest rate of 5%, and it made an interest payment of $500 on December 31, the liabilities would be reduced by $500.