At year-end, it was forgotten to adjust the asset prepaid rent for the $7,000 rent expense used-up during the year. This will result in an:
A)understatement of assets and an overstatement of profit and equity.
B)understatement of assets, profit, and equity.
C)overstatement of liabilities and an understatement of profit and equity.
D)overstatement of assets, profit, and equity.

Question

Quizplus · Accepted Answer

Failing to adjust prepaid rent for the used-up portion leads to not recognizing the expense. This results in the assets (prepaid rent) being overstated because the expense that should have reduced it wasn't recorded. Consequently, profit and equity are also overstated because expenses were understated, leading to higher net income and retained earnings.

At Year-End, It Was Forgotten to Adjust the Asset Prepaid