Question

ABC Corp accumulates the following adjustment data at December 31. 1. Revenue of $1,600, collected in advance, has been recognized because the firm has completed its performance obligation. 2. Salaries of $600 are unpaid. 3. Prepaid rent totaling $500 has expired. 4. Supplies of $450 have been used. 5. Revenue recognized but unbilled total $750. 6. Utility expenses of $250 are unpaid. Failure to record the appropriate adjustment for (2) above would lead to: O An overstatement of equity An understatement of equity An overstatement of assets O An understatement of assets

Answer 1

Failure to record the adjustment for (2) will lead to overstatement of Equity. it will also lead to overstatement of Net income, understatement of expense and understatement of liabilties.

Salaries unpaid means the amount which is due to be paid in current financial year but due to some reasons not paid in this year and made due to next year.

Note:
Journal entry for Salaries unpaid will be:
Salaries Dr. $600
Salaries payable Cr. $600

If this entry would have been done in the books, Expense and outstanding liability will be recorded in income statement and balance sheet respectively. Non recording of such transaction would lead to omission of expense and liability to be recorded.
44)

(1) If revenue of $1600 adjustment is not recorded then it will lead to Understatement of revenues, understatement of Net Income, understatement of equity, overstatement of liabilities.

(3) If prepaid rent expired adjustment was not recorded then it will lead to Understatement of expenses and overstatement of Net income, assets and equity.

(4) If adjustment of supplies was not recorded then it will lead to Understatement of expense and overstatement of Net income, assets and equity.

(5) If unbilled revenue recognition adjustment was not recorded then it will lead to Understatement of revenue, net income, equity and assets.

(6) If unpaid utility expenses adjustment was not recorded then it will lead to Understatement of expense and liabilities and overstatement of net income and equity.