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12 June, 16:45

On August 1, Brooks Company received $13,800 for six months of rent in advance. Brooks credited Deferred Rent Revenue. If the appropriate adjusting entry is not made at the end of the year, what will be the effect on:

(a) Income statement account

(b) Net Income

(c) Balance Sheet account

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Answers (1)
  1. 12 June, 17:27
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    In this question, we assume that the financial year is the calendar year

    The financial year is remaining for 5 months whereas the calendar year is remaining for 6 months

    So for 5 months, the rent would be treated as income

    And for 1 month, it would be treated as a liability

    If the appropriate adjusting entry is not made.

    So, the effect would be

    (a) Income statement account = Revenue is overstated, expense = no effect

    (b) Net Income = Since revenue is overstated, so net income is also overstated

    (c) Balance Sheet account = Assets = no effect, liabilities = understated and retained earnings = overstated
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