At year-end,it was forgotten to adjust the asset prepaid rent for the $5,000 rent expense used-up during the year.This will result in an:
A) understatement of assets and an overstatement of profit and equity.
B) overstatement of assets, profit, and equity.
C) overstatement of liabilities and an understatement of profit and equity.
D) understatement of assets, profit, and equity.

Question

Quizplus · Accepted Answer

Not adjusting for the used-up prepaid rent will mean the prepaid rent asset remains overstated by $5,000, as the expense has not been recognized. This leads to an overstatement of profit (since expenses are understated) and, consequently, an overstatement of equity, as retained earnings (part of equity) are inflated due to the higher profit.

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