X Company prepares monthly financial statements. The balance in Unearned (Deferr
ID: 2501449 • Letter: X
Question
X Company prepares monthly financial statements. The balance in Unearned (Deferred) Revenue on October 1 is $1,126. As of October 31, $371 of the $1,126 had been earned, but the accountant failed to record the appropriate adjusting entry. What was the effect on the October 31 Balance Sheet?
In January, X Company, a merchandiser, purchased inventory on account. The accountant incorrectly recorded the transaction as an increase in Inventories and a decrease in Retained Earnings. As a result, which of the following is true regarding the January financial statements?
Explanation / Answer
Entry to be recorded :
Unearned revenue debit 371 [current Liabilities ]
Service revenue credit 371 [Retained earnings (net income) ]
[being unearned revenue earned ]
Balance sheet effect :
Current liabilities is overstated and retained earning is understated .(as revenue is not recorded so net income is understated ]
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