Question

BJ Corporation is a cash-basis business. BJ signed a six-month, 12% note payable of $5,000 on October 1st, 2022. By recording the interest expense related to the note only when it is paid on April 1st, 2023, BJ will understate expenses by ________ on its year-end financial statements on December 31st, 2022. A : $5,600 B : $300 C : $0 D : $150

Answer 1

Answer:

D : $150

Explanation:

The computation of the interest expense understated is given below:

= Note payable amount × rate of months × given months ÷ number of months

= $5,000 × 0.12 × 3 months ÷ 12 month

= $150

Hence, the interest expense that would be understate by $150

Therefore the correct option is d.