Accrual Basis for Interest Expense

Steps:

• Cash paid for debenture interest during the year: $1400.
• Accrued debenture interest at year-end: $700, representing unpaid expense for the year.
• Total interest expense incurred: $1400 paid +$700 accrued = $2100.
• Record $2100 as expense in income statement; no impact on changes in equity statement.

Why B is correct:

• Accrual accounting principle requires recognizing all expenses incurred in the period, so total $2100 debenture interest appears in the income statement.

Why the others are wrong:

• A: Ignores accrual, understating expense at $1400 in income statement.
• C: Misplaces expense in changes in equity statement, which is for equity transactions, not operating expenses.
• D: Uses incorrect $2100 amount in wrong changes in equity statement.

Final answer: B