Question

Crane Inc. pays its rent of $69600 annually on January 1 and makes monthly adjustments. If the February 28 monthly adjustment for prepaid rent is omitted, which of the following are true?

A. Assets will be overstated by $11600 and net income and stockholders' equity will be understated by $11600.

B. Assets will be overstated by $5800 and net income and stockholders' equity will be overstated by $5800.

C. Failure to make the adjustment does not affect the February financial statements.

D. Expenses will be overstated by $5800 and net income and stockholders' equity will be understated by $5800.

Answer 1

If the February 28 monthly adjustment for prepaid rent is omitted, the correct statement would be:

D. Expenses will be overstated by $5800 and net income and stockholders' equity will be understated by $5800.

By omitting the adjustment, expenses will be higher than they should be, leading to an overstatement of expenses and a corresponding understatement of net income and stockholders' equity.