On November 1, 2018, Sky Mountain Co. borrowed $200,000 cash on a 1-year note payable with a 6% annual rate that requires Sky Mountain to pay all the interest as well as the principal on October 31, 2019. Assuming the November 1 transaction was properly recorded, how would the December 31, 2018, year-end adjusting entry affect the accounting equation?

Multiple Choice

• Liabilities decrease and stockholders' equity increases.

• Both assets and stockholders' equity increase.

• Liabilities increase and stockholders' equity decreases.

• Liabilities increase and stockholders' equity increases.