Pixies Inc.pays its rent of $54,000 annually on January 1.If the February 28 monthly adjusting entry for prepaid rent is omitted, which of the following will be true?

Question

Quizplus · Accepted Answer

If the adjustment for prepaid rent is omitted, the prepaid rent (an asset) remains higher than it should be by the amount of rent that should have been expensed ($4,500 for two months of rent at $54,000/12 per month), and because the expense is not recognized, net income and stockholders' equity are not reduced by this expense, thus being overstated by the same amount.