When A-1 Autos understates both its interest payable and dividends amounts by $100 in its adjusted trial balance for the month, the following scenario occurs:
- The adjusted trial balance will still balance.
- The income statement will be correct because interest expense and dividends do not impact it directly when understated in this way.
- However, the retained earnings statement will be incorrect because dividends reduce retained earnings.
- The balance sheet will not balance because interest payable (a liability) and dividends (which reduce retained earnings in equity) are both understated, causing an imbalance between assets and liabilities plus equity.
In summary, A-1's adjusted trial balance would balance and the income statement would be correct, but its retained earnings statement would be incorrect, and the balance sheet would not balance due to the dual understatement of interest payable and dividends.
