Question

The accountant of Delta, Inc. failed to make an adjusting entry to record $6,000 of unearned service revenue that has now been earned. Assume the deferred revenue was initially recorded as a liability. Which of the following statements is true?

A. The total expenses will be overstated.
B. The total expenses will be understated.
C. The total revenue will be overstated.
D. The total revenue will be understated.
E. None of the above

Answer 1

The total revenue will be understated.

Step-by-step explanation:

The correct statement regarding the failure to make an adjusting entry for the $6,000 of unearned service revenue that has now been earned is option D: The total revenue will be understated.

When the unearned service revenue is initially recorded as a liability, it represents the amount that the company owes to its customers for services not yet provided. However, once the service is provided, the liability decreases and revenue increases. In this case, since the adjusting entry was not made, the revenue from the service will not be recognized, resulting in an understatement of the total revenue.

Conversely, options A, B, and C are incorrect because failing to record the adjusting entry for the unearned service revenue does not directly affect the total expenses. Instead, it affects the recognition of revenue.