Question

1. The accountant failed to make the adjusting entry to record the depreciation for the year. This error would cause

   a. an understatement of shareholders' equity.

   b. an understatement of liabilities.

   c. an overstatement of expenses.

   d. an overstatement of assets.

Answer 1

--Omission of adjustment entry for depreciation expense will lead to understated Depreciation expense.

--Understated expense = Overstated Net Income = Overstated Retained earnings = Overstated Stockholder's equity.

--Also, understated Depreciation expense = understated Accumulated Depreciation account balance.

--This means that Assets will be overstated because accumulated depreciation would be understated.

--Correct Answer = Option 'D' an overstatement of assets.