Question

If an entity fails to adjust a Prepaid rent account for rent that has expired, what...

If an entity fails to adjust a Prepaid rent account for rent that has expired, what effect will this have on that month's financial statements?

Select one:

a. Failure to make an adjustment does not affect the financial statements.

b. Expenses will be overstated and profit and equity will be understated.

c. Assets will be overstated and profit and equity will be understated.

d. Assets will be overstated and profit and equity will be overstated.

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Answer #1

Answer:- correct option is (d) assets will be overstated and profit and equity will be overstated.

Explanation:- prepaid expenses are classified as an assets on a company balance sheet since their balance represent a benefit that will used in future period. If the company fail to adjust prepaid rent this means that the company expenses have been understated by that amount resulting in overstated income by that amount it also means that the prepaid expenses asset account on the company balance sheet has been overstated by that amount . fail to adjust the prepaid expenses will effect the company balance sheet and income statement in such a way that assets will be overstated and profit and equity will be overstated.

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