Question

Assume that the company failed to record any of the adjusting entries that were needed. What is the overall overstatement or understatement of net income as a result of not recording these? Net income would be * More Info a. Depreciation, $600. b. Prepaid rent expires, $800. c. Interest expense accrued, $700. d. Employee salaries owed for Monday through Thursday of a five-day workweek; weekly payroll, $11,000. Unearned revenue earned, $1,500. f. Office supplies used, $100. Print Done

Answer 1

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Statement showing effect of failure to record the adjusting entries Entries Effect on Income Over/Under statement Depreciation $600 Overstatement Prepaid Rent expires $ 800 Overstatement Amount ($) Remarks 600 Depreciation is an expenditure. Failure to record an expenditure will enhance the income. So overstatement of income. As per matching concept, prepaid expenses are charged to the period to which they belongs. Failure to record the prepaid expenses to the relevant period results in underreporting of expenses and overstatement of Income. As per matching concept, accrued expenses are charged to the period to which they 700 belongs. Failure to record the accrued expenses to the relevant period results in underreporting of expenses and overstatement of Income. 800 b Interest expenses accrued $ 700 Overstatement Employees salaries owed for Monday to Thrusday Overstatement 8800 Unpaid salary is an accrued expense. As per matching concept, accrued expenses are charged to the period to which they belongs. Failure to record the accrued expenses to the relevant period results in underreporting of expenses and overstatement of Income. Unearned revenue earned 1500 Understatement -1500 Unearned revenue is treated as income of the period when it is earned. Therefore, not recording the same will result in understatement of income. Office supplies used is an expense, not recording the same will result in understatement of expenses. Therefore, this will result in overstatement of income. Office supplies used $100 Overstatement 100 Overstatement 9500 Net income would be Overstated by $9,500