Which of the following transactions that impact current liabilities has a corresponding entry on the income statement?

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BlackTom AI · Accepted Answer

We are asked to evaluate which transaction that affects current liabilities also has a corresponding entry on the income statement.

Option 1: Purchase inventory on credit from company XYZ on January 1.
- Impact on accounts: This increases accounts payable (a current liability) and increases inventory (an asset).
- Income statement impact: No immediate effect on the income statement at the time of purchase because the expense (cost of goods sold) is recognized later when the inventory is sold, not when it is purchased. Thus, this entry does not have an immediate income statement counterpart.

Option 2: Payment to employees in March for wages earned in February.
- Impact on accounts: This reduces cash and may settle a liability if wages were previously accrued, or it reduces cash if wages were expensed upon payment.
- Income statement impact: Wage expense is typically recognized when the work is performed (February), so the March payment often does not generate a new income statement expense entry in the period of payment if the expense was already recognized when earned. If the company uses accrual accounting and had accrued wages payable, the payment would reduce a liability and not create an additional expense in March. Therefore, this has an indirect or no immediate income statement connection in the period of payment.

Option 3: Payment to XYZ on February 1 for a January 1 purchase.
- Impact on accounts: This reduces accounts payable (or cash if previously paid) and reduces cash.
- Income statement impact: The January 1 purchase, if it was on credit, would have affected cost of goods sold only when the inventory is sold, not at payment. The payment itself does not create a new expense or revenue entry; it simply settles the liability. The immediate income statement effect is not present.

Option 4: Interest accrued on a note payable.
- Impact on accounts: Accrued interest increases interest payable (a current liability) and also increases interest expense on the income statement.
- Income statement impact: This transaction directly creates an expense (interest expense) in the same period that the interest accrual is recognized, providing a clear linkage between the current liability and the income statement.

In summary, the only option that simultaneously increases a current liability and generates a corresponding income statement expense is the one involving interest accrual. The other options involve current liabilities or assets without an immediate, matching income statement entry in the same period.

Which of the following transactions that impact current liabilities has a corresponding entry on the income statement?

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