Question

1. On October 1, a company received $3,600 for services to be performed over the next 6 months, with an equal amount of work to be completed each month. If no adjusting entry is made on December 31,

Select one:

a. net income will be understated by $3,600

b. net income will be understated by $1,800

c. net income will be overstated by $1,800

d. net income will be overstated by $3,600

e. net income will be understated by $2,400

2. At the end of the fiscal year, the usual adjusting entry to update Prepaid Insurance for the portion of the benefit that was used up / expired was accidentally omitted. Which of the following statements is true?

Select one:

a. Total assets at the end of the year will be understated.

b. Stockholders' Equity at the end of the year will be understated.

c. Net Income for the year will be overstated.

d. Insurance expense will be overstated.

e. None of the above.

Answer 1

1.

On October 1, $3,600 was received for services to be performed over the next 6 months.

Equal amount of work was completed each month.

Therefore,

Revenue earned from October 1 to December 31 = $3,600 x 3/6 = $1,800

If this $1,800 revenue is not recognized through an adjusting entry on December 31, the net income will be understated by the same amount.

Thus, the correct answer is b. net income will be understated by $1,800

2.

When the usual adjusting entry to update Prepaid Insurance for the portion of the benefit that was used up / expired is omitted, insurance expense for the period will not be recognized.

If an expense is not recognized, the net income is overstated.

Therefore, the correct answer is c. Net Income for the year will be overstated