Question

A company forgot to prepare the adjustment to record the current month’s portion of Prepaid Rent. What is the resulting impact on the financial statements? A : Assets will be overstated and liabilities will be overstated. B : Assets will be understated and expenses will be overstated. C : Liabilities will be understated and expenses will be understated. D : Assets will be overstated and net income will be overstated.

Answer 1

D. Assets will be overstated and net income will be overstated.

Step-by-step explanation:

The adjusting entry for current month's rent would have been:

Rent expense Dr.

To Prepaid rent

The above adjusting entry would have:

1. Increased the expenses.
2. Increase in expenses would have decreased the net income for the period.
3. Decrease in net income would have decreased the stockholders' equity.
4. Also, rent expense would have decreased the prepaid rent. Thus, assets would have been decreased.

The failure to record adjusting entry would lead to:

1. Understatement of expenses.
2. Overstatement of Net income.
3. Overstatement of stockholders' equity.
4. Overstatement of assets.