Question

Please Explain also:

1. Which of the following is not one of the four types of adjustments?

1. Prepaid revenue
2. Accrued expenses
3. Unearned revenue
4. Prepaid expenses

2. In September 20X3, LaToya Corporation paid for insurance for the next six months in the amount of $42,000. On December 31, LaToya’s accountant forgot to make the adjusting entry that was needed. Which of the following is true?

1. Assets are understated by $42,000.
2. Net income is understated by $14,000.
3. Expenses are overstated by $42,000.
4. Net income is overstated by $28,000.

Answer 1

Answer is as follows:

1. Prepaid revenue

The types of adjustments we usually made are:

a. Accrued Revenue

b. Accrued expenses

c. Prepaid expenses

d. Unearned Revenue

e. Depreciation

2. Net income is overstated by $28000

Insurance paid = $42000 for next 6 months

Paid in September 20X3

Entry made at the time of payment : Prepaid Insurance A/C Dr $42000

To Cash A/c $42000

Adjustment entry to be made on 31, December : Insurance A/C Dr $28000 ( $42000*4/6)

To Prepaid Insurance A/C $28000

But this adjustment entry has not been made on December,31. It results in not accounting for expense of $28000. Which means the not accounting of expense results in overstatement of net income of $28000.