Havana Cigar Company borrows money in January of the current year from a bank and agrees to pay interest of 8% on the maturity date of the loan, which is two years after the money is borrowed. If the proper adjustment is NOT made at the end of the first year (12 months later) what would be the effect on the financial statements?

• A.

  Expenses will be overstated.

• B.

  Cash will be overstated on the balance sheet.

• C.

  Expenses will be understated.

• D.

  Cash will be understated on the balance sheet.