Question

Question: In making adjusting entries at the end of its accounting period, Chao Consulting mistakenly forgot to record:

∙ $3,200 of insurance coverage that had expired (this $3,200 cost had been initially debited to the Prepaid

Insurance account).

∙ $2,000 of accrued salaries expense.

As a result of these oversights, the financial statements for the reporting period will [choose one] (1) understate

assets by $3,200; (2) understate expenses by $5,200; (3) understate net income by $2,000; or

(4) overstate liabilities by $2,000

Answer 1

Step 1: Definition of accrued salaries

When salaries are due but not paid, this is known as accrued salaries. These salaries are earned by the employees but not paid by the company.

Step 2: Reporting of expenses

In the given situations, expenses are increased by $5,200; hence, according to rules, whenever expenses increase, we understate the expenses by $5,200. 

Understate expenses by $5,200