Brutal FSA Question, Part 3

A company receives $10,000 on December 1 in advanced payment for December and January rent. On receipt, the company correctly records it as cash and unearned revenue. If at December 31, their year end, they failed to make an adjusting entry relating to this payment, what would be the effect on the financial statements for the year be? A. assets overstated by 5000, liabilities overstated by 5000 B. liabilities overstated by 5000, net income overstated by 5000 C. assets overstated by 5000, owners equity overstated by 5000 D. liabilities overstated by 5000, owner’s equity understated by 5000

D) once the unearned revenue is earned the liability account would have been reduced and the earnings flow to equity… since this never happened the liability (unearned revenues) was never reduced to reflect services provided… and equity account never realized the gain.

thanks char-lee. question: how do you know the earnings flow to equity? I was thinking that the earning would flow to assets. Definitely, liabilities are overstated because the company failed to make the adjustment for liabilities.

Good question on accounting concepts.

A? Do you have the answer?

yancey Wrote: ------------------------------------------------------- > question: how do you know the earnings flow to > equity? uhhh… it basic accounting 101. Retained earnings is the accumulation of net incomes past, less dividends paid over time.

the answer is D liabilities are overstated and equity is overstated

any thoughts on this - if it wasn’t year end reporting, would it be answer A for immediate adjustments?

Mystically, this is pure accounting staff… It is based on the reporting of prepayment and accruals. If you write down the journal entry in a T account, it will make sense.

I don’t think this is a brutal question. infact this is a very basic question, I am just wondering what will you do when REALLY brutal questions will come on exam Check on the forum subject Nice Question by strangedays.