Final answer:
Prepaid rent that has expired should be adjusted by recording it as an expense, which decreases both assets and earnings. If not adjusted, both assets and net income will appear overstated because the cost is not appropriately reflected in the financial statements.
Step-by-step explanation:
If the required adjusting entry for prepaid rent that has expired for the period is omitted, the answer is C) assets will be overstated and net income overstated. Here's why: Prepaid rent is initially recorded as an asset because it represents a payment for a rent expense that will benefit future periods. As time passes and the rental period elapses, this prepaid rent should be adjusted to reflect the actual expense incurred during the period. This involves decreasing the asset account for prepaid rent and increasing the rent expense.
If this adjusting entry is not made, the asset - prepaid rent - remains too high because the portion that has expired is not correctly reclassified as an expense. At the same time, because the expense is not recorded, the net income will be higher than it should be. Instead of recognizing the rent cost that corresponds to the period, the expense account is understated, leading to the overstating of net income.