Question

1. On July 1 of the current year, a company purchased equipment. The company neglects to record the adjusting-entry for depreciation before preparing the current year’s financial statements.   Which of the following is correct regarding the company’s financial statements for the current year?

a) Revenues are understated.

b) Expenses are overstated.

c) Assets are overstated.

d) Retained earnings is understated.

e) Liabilities are understated.

2.

A company borrowed money from a bank by signing a three-year note payable in the amount of $12,000 on May 1. The note requires the company to pay interest at an annual rate of 8%. The company records adjusting entries on December 31. The adjusting entry that the company should record for accrued interest on December 31 of the same year would include a debit to interest expense for

a) $1,200.

b) $2,880.

c) $600.

d) $160.

e) $640.

Answer 1

1. Answer is c) Assets are overstated

The company should have recorded depreciation expense by debiting depreciation expense and crediting accumulated depreciation. Accumulated depreciation will be deducted from the cost of the asset in the Balance sheet. Since the adjusting entry is not passed the expense are understated and assets are overstated. There is no impact on revenue and liabilities due to this entry. Since expense is not recorded Retained earnings will be overstated due to higher net profit. Hence answer is C) Assets are overstated

2. Answer is e) $640

Accrued interest adjusting entry should be passed at the end of the year.

Calculation: $12,000* 8% * 8 months / 12 months = $640

The entry should be interest expense debit and credit interest payable