Question

Jane Company collected $5,000 cash in advance on December 1, 2007 for services to be performed in December 2007 and the remainder in 2008. A temporary account was credited to record the December 1, 2007 transaction. Jane prepares financial statements as of December 31. If an adjusting entry was not made at end of December, 2007:

a. Total liabilities at 12/31/07 would be understated and total assets at 12/31/07 would be overstated.

b. Total liabilities at 12/31/07 would be overstated and total assets at 12/31/07 would be understated.

c. Total liabilities at 12/31/07 would be overstated, total revenue at 12/31/07 would be understated and total revenue at 12/31/08 would be overstated

d. Total liabilities at 12/31/07 would be understated, total revenue at 12/31/07 would be overstated and total revenue at 12/31/08 would be understated.

e. None of the above.

Answer 1

The answer is "c. Total liabilities at 12/31/07 would be overstated, total revenue at 12/31/07 would be understated and total revenue at 12/31/08 would be overstated."

This is because we received an advance for services to be performed in December 2007 and remainder in 2008 So, the revenue of December 2017 should be recorded. If the same is not recorded the liabilities will be overstated as when cash was received was credited to a temporary acconty. And revenue at 12/31/07 will be understated as revenue for December 31 is not recorded. And also revenue of Decemeber 31 2017 would be recorded at 2018 as a result the total revenue at 12/31/08 would be overstated.