Question

The accountant for Trumbull Corp. failed to make the adjusting entry to record depreciation for the current year. The effect of this error is which of the following?

a. Assets are overstated; stockholders' equity and net income are understated
b. Net income is overstated and liabilities are understated
c. Assets and expenses are understated; net income is understated
d. Assets, net income, and stockholders' equity are all overstated

Answer 1

The omission of the adjusting entry to record depreciation will result in overstated assets, net income, and stockholders' equity because depreciation expense is not subtracted from these values.

Step-by-step explanation:

If the accountant for Trumbull Corp. neglected to make the adjusting entry to record depreciation for the current year, the following will be the effect: Assets will be overstated because they would not have been reduced by the depreciation expense; Net income will be overstated because expenses would be understated without recording depreciation, leading to a higher profit; and finally, stockholders' equity will also be overstated because the net income is part of the retained earnings, which falls under stockholders' equity. This situation aligns with option d, which indicates that assets, net income, and stockholders' equity are all overstated as a result of not recording depreciation.