Question

An audit of Kennedy Co. for its first year of operations detected the following errors made at December 31:

- Failed to accrue $50,000 interest expense

- Failed to record depreciation expense on office equipment, $80,000

- Failed to amortize prepaid rent expense of $100,000

- Failed to delay recognition of prepaid insurance expense of $60,000

The net effect of these errors was to overstate net income for the year by??????

Answer 1

Overstatement of income for the year by $ 170,000 Fail to recognise expenses Interest expenses Depreciation expense Rent expense $ $ $ 50,000 80,000 100,000 $ 230,000 Expenses over booked Insurance expense Overstatement of income for the year $ $ (60,000) 170,000 If the expenses are not recorded, income will be overstated. Hence accrue interest, depreciation expense, amortization of rent overstates the income. Delay in recognising prepaid insurance means total amount paid towards the insurance recorded under the insurance expenses. This will understates the income.