Correcting loan principal and interest expense errors Steps:

• Draft profit is $8,770, including$4,800 loan principal as revenue and full-year interest expense of $240.
• Remove loan principal from revenue: subtract $4,800.
• Calculate correct interest expense for 3 months (1 Jan–31 Mar): $4,800 × 5$60.
• Adjust overstated interest ($240 –$60 = $180): add back$180 to profit.
• Corrected profit: $8,770 –$4,800 + $180 =$4,150.

Why B is correct:

• Matches the net adjustment of –$4,800 (remove revenue) +$180 (reduce overstated expense) per accrual accounting rules for liabilities and period-specific expenses.

Why the others are wrong:

• A: Subtracts loan principal but also deducts full interest $240, ignoring proration (yields ~$3,730).
• C: Uses 4-month proration for interest (~$80 correct), yielding$4,370 net.

Final answer: B