Question

For each of the following situations, indicate whether not recording the necessary adjusting entry will result in (i) an overstatement of net income (net income is higher than it would otherwise be), (ii) an understatement of net income (net income is lower than it would otherwise be), or (iii) no effect on net income. Briefly explain your conclusion.
a. Depreciation expense isn’t recorded.
b. Interest is earned on a bond but the cash won’t be received until next year. The interest earned isn’t recorded.
c. A company receives a deposit from a customer for services that will be provided in the following year. When the services are provided in the following year, the company doesn’t make an adjusting entry.
d. A company purchases a two-year insurance policy on the first day of the year and records the purchase as prepaid insurance. At the end of the year, no adjustment is made to reflect the portion of the policy that was consumed.
e. An entry to record interest on a loan that isn’t payable until next month isn’t recorded.
f. Wages are earned by employees in the last week of the year but won’t be paid until next year. The wages earned aren’t recorded.



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  • CreatedFebruary 26, 2015
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