A is corrent because although the interest does not have to be paid until September 1, year 3, proper accrual accounting requires that at the end of each year an adjusting entry be made to accrue that year’s interest expense. Therefore, at the end of year 1, 4 months’ interest would be accrued. At the end of year 2, an additional 12 months of interest would be accrued, which makes the total interest accrued as of December 31, year 2, equal 16 months.
B is incorrect because it refers to the year 1 liability for accrued interest, not the year 2 liability for accrued interest.
C is incorrect because proper accounting requries an entry to accrue that year’s interest expense.
D is incorrect because balance sheet accounts are permanent accounts. Therefore, the year 2 liability for accured interest would also include the year 1 liability for accrued interst.
|
