For each of the following economic events, indicate the effect that not recording the necessary adjusting entry associated with the transactional entry at year-end would have on the financial statements. Indicate whether not recording the required adjusting entry would result in:
i. An overstatement of assets, liabilities, owners' equity, or net income,
ii. An understatement of assets, liabilities, owners' equity, or net income, or
iii. No effect on assets, liabilities, owners' equity, or net income.
Provide explanations for your conclusions and state any assumptions you make. Assume a December 31 year-end. To respond, you will need to determine the required journal entry.
a. A travel company sells packaged vacations to customers in advance and recognizes revenue when the customer departs on the vacation. (Respond from the travel company's perspective
b. An investment in a long-term corporate bond pays interest on March 31 and September 30 of each year. (Consider this from the perspective of the entity issuing the bond.)
c. On October 1, a tenant pays $12,000 to cover six months' rent beginning October 1. The tenant records the payment as prepaid rent. (Respond from the tenant's perspective.)
d. A retail store pays a percentage of its sales as rent to the property owner. The payment is made three months after its year-end, when the financial statements are released. (Respond from the property owner's perspective.)
e. A retail store pays a percentage of its sales as rent to the property owner. The payment is made three months after its year-end, when the financial statements are released. (Respond from the retail store's perspective.)