Question

On July 1, 20X0, CriCo takes out a 10%, $10,000 note payable that is due on July 1, 20Xl. No interest is accrued at year-end 20X0 If no corrections are made, which of the following statements is correct?

a. On CriCo's 20XO income statement, net income is understated by $500.
b. On CriCo's 20X0 income statement, net income is overstated by $500.
c. On CriCo's 20X0 balance sheet, retained earnings is understated by $500.
d. On CriCo's 20X0 balance sheet, liabilities are overstated by $500.

Answer 1

The correct statement is that on CriCo's 20X0 income statement, net income is overstated by $500 option (b), due to failure to accrue six months' worth of interest on the note payable.

Step-by-step explanation:

On July 1, 20X0, CriCo takes out a 10%, $10,000 note payable that is due the following July 1, 20X1. Since no interest is accrued at the end of 20X0, if no corrections are made, the correct statement is b. On CriCo's 20X0 income statement, net income is overstated by $500.

This is because the interest for six months from July 1 to December 31 of 20X0 should have been recorded as an expense, which would have decreased net income. The interest expense for six months at 10% on $10,000 is $500 (10% of $10,000 = $1,000 annual interest, so $1,000/2 = $500 for six months).