Effect of an error on financial statements
On May 1, 2011, Southern Corporation paid $9,000 cash in advance for a one-year lease on an office building. Assume that Southern records the prepaid rent as an asset and that the, books are closed on December 31.
Required
a. Show the payment for the one-year lease and the related adjusting entry to recognize rent | expense in the accounting equation.
b. Assume that Southern Corporation failed to record the adjusting entry to reflect using the office building. How would the error affect the Company’s 2011 income statement and balance sheet?
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