When A-1 Autos mistakenly understates both its Interest Payable and Dividends amounts by $100 each in its adjusted trial balance for the month:
- The adjusted trial balance will still balance. This is because both accounts are understated by the same amount, so the totals on the debit and credit sides remain equal.
- The income statement will be correct. Interest expense affects the income statement, but interest payable is a liability account reported on the balance sheet, so the understatement of interest payable does not affect the income statement. Dividends are not reported on the income statement but are a distribution of earnings.
- The balance sheet will balance as well because the understatement in liabilities (Interest Payable) is offset by a corresponding understatement in equity (Dividends).
- However, the retained earnings statement will be incorrect due to the understatement of dividends, which reduces the amount deducted from retained earnings.
Therefore, in this case, the adjusted trial balance and balance sheet both balance and the income statement is correct, but the retained earnings statement is incorrect because of the understated dividends amount.
