Final answer:
The correct answer is C. net income is overstated by $2,300, due to the omission of adjusting entries for supplies used, unearned revenue earned, and insurance expired which led to an understatement of expenses by $6,500 and an understatement of revenues by $4,200.
Step-by-step explanation:
In the scenario where Orion, Inc. omitted adjusting entries, we need to look at the effects on revenues, expenses, and net income. The omission of an adjustment for $1,500 of supplies used means expenses are understated, as these supplies should have been recorded as an expense. Neglecting to recognize $4,200 of unearned revenue that was earned during the period means revenue is understated, because this amount should have been included in revenues. Lastly, failing to account for $5,000 of expired insurance means expenses are again understated, as this insurance cost should have been allocated as an expense over its benefit period.
The total expenses were understated by $6,500 (the sum of the omitted supplies expense and insurance expense). However, revenue was also understated by $4,200 due to the unearned revenue that was in fact earned. To understand the net effect on net income, we subtract the revenue understatement from the expense understatement, which gives us ($6,500 - $4,200) = $2,300. This means the net income is overstated by $2,300 because the omitted expenses would have reduced net income if they had been recorded correctly, and the earned revenue would have increased it.
Therefore, the correct answer is C. net income is overstated by $2,300.