Question

Assuming that Mccphae Corporation has done each of the following in preparation for its fiscal year-end December 31, 2020 statements, and no adjustments or corrections were made except as noted, what would be the effect of each on: (a) total assets on December 31, 2020? (b) total liabilities on December 31, 2020? (c) owners’ equity on December 31, 2020? (d) cash on December 31, 2020? Circle U/S for understate, O/S for overstate, or NE for no effect. Treat each item independently and ignore income tax effects. 1. No entry for accrued interest on a note payable was made. The $60,000 note was issued on March 1, 2020 and accrues 8% interest annually. The interest will be paid on March 1, 2021. (a) total assets U/S O/S NE (b) total liabilities U/S O/S NE (c) owners’ equity U/S O/S NE (d) cash U/S O/S NE 2. Insurance of $6,000 was prepaid on November 1, 2020 for the six months beginning November 1 and recorded as “Prepaid Insurance.” On December 31, 2020, the following adjustment was made: Insurance Expense $2,000 Cash $2,000 (a) total assets U/S O/S NE (b) total liabilities U/S O/S NE (c) owners’ equity U/S O/S NE (d) cash U/S O/S NE 3. Employee wages of $100,000 were earned in December, but will be paid in January of 2021. No entry was recorded. (a) total assets U/S O/S NE (b) total liabilities U/S O/S NE (c) owners’ equity U/S O/S NE (d) cash U/S O/S NE 4. Depreciation of factory equipment for $200,000 was not recorded. (a) total assets U/S O/S NE (b) total liabilities U/S O/S NE (c) owners’ equity U/S O/S NE (d) cash U/S O/S NE

Answer 1

No.	(a) Total assets	(b) Total liabilities	(c) Owners' equity	(d) Cash
1	NE	U/S	O/S	NE
2	NE	NE	NE	U/S
3	NE	U/S	O/S	NE
4	O/S	NE	O/S	NE

Explanations:

1. Interest expense is understated due to which owners' equity is overstated. Interest payable is understated due to which total liabilities is understated.

2. The correct entry would be insurance expense debit and prepaid insurance credit. The expense is correctly recorded so no effect on owner's equity. Instead of credit to prepaid insurance, cash has been credited so there is no effect on total assets but cash is understated.

3. Wages expense is understated due to which owners' equity is overstated. Wages payable is understated due to which total liabilities are understated.

4. Depreciation expense is understated due to which owners' equity is overstated. Accumulated depreciation is understated due to which total assets are overstated.