Question

The Clark Company fails to record these two journal entries:

Amortization of Premium on Bond Payable: $40

Cash Dividends declared: $10

Total Stockholders’ Equity will be:

Select one:

a. $10 overstated

b. $30 overstated

c. $30 understated

d. $50 overstated

e. $50 understated

Answer 1

With amortization of premium recorded, the interest expense will be reduced and hence the net income increases
Dividend paid recorded will reduce the balance of Retained earnings
The Effect of two entries on equity:
Equity increases with the amount of Premium amortized	40
Equity decreases with the amount of dividend paid		-10
Net Increase in equity				30
Thus, the equity is understated with $30 due to not recording of above entries
Answer is c. $ 30 understated