14SE - Horngren'S Financial And Managerial Accounting

Question

Question :In recording adjusting entries, Reagan Financial Advisors failed to record the adjusting entries for the following situations: a. Office supplies on hand, \(100. b. Accrued revenues, \)5,000. c. Accrued interest expense, \(250. d. Depreciation, \)800. e. Unearned revenue that has been earned, $550. Determine the effects on the income statement and balance sheet by identifying whether assets, liabilities, equity, revenue, and expenses are either overstated or understated. Use the following table. Adjustment a has been provided as an example.Adjustment Not Recorded (a) Overstated Overstated Understated Assets Liabilities Equity Revenue Expenses Balance Sheet Income Statement

Step-by-Step Solution

Answer

	Balance Sheet	Income Statement
Adjustment Not Recorded	Assets	Liabilities	Equity	Revenue	Expenses
(a)	Overstated		Overstated		Understated
(b)	Understated		Understated	Understated
(c)		Understated	Overstated		Understated
(d)	Overstated		Overstated		Understated
(e)		Overstated	Understated	Understated

Step-by-Step-Solution Step1: Explanation on Office Supplies

If adjusting entry for ending supplies is not record, then supplies expense will be reduced, and net income will be increased, which will increase equity. Also it will increase the supplies balance in asset section.

Step2: Explanation on Accrued Revenues

If accrued revenues are not recorded, then it will decrease revenue, which will decrease equity. Also it will decrease the accounts receivable under asset section.

Step 3: Explanation on Accrued Interest Expense

If accrued expense is not recorded, it will reduce the expenses and will increase the net income. As net income is increased it will increase equity. Also it will decrease expense payable under liabilities section.

Step 4: Explanation on Depreciation

If depreciation expense is not recorded, it will reduce the expenses and will increase the net income. As net income is increased it will increase equity. Also it will increase assets balance in balance sheet.

Step 5: Explanation on Unearned Revenue

If revenue is not recognized out of unearned revenues, then it will decrease revenue, which will decrease equity. Also it will increase the unearned revenue under liabilities section of balance sheet.