X Company prepares monthly financial statements. The balance in Unearned (Deferr

Question

X Company prepares monthly financial statements. The balance in Unearned (Deferred) Revenue on October 1 is $1,381. As of October 31, $365 of the $1,381 had been earned, but the accountant failed to record the appropriate adjusting entry. What was the effect on the October 31 Balance Sheet?

Retained Earnings would be understated by $1,016.
Total assets would be understated by $365.
Total liabilities would be understated by $1,016.
Total liabilities would be overstated by $1,016.
Total liabilities would be overstated by $365.
Retained Earnings would be overstated by $365.

Explanation / Answer

As deferred revenue is included in liabilities, if the amount is earned and not recorded the deferred liability will overstate by the amount of earned income. So the correct answer is: Total liabilities would be overstated by $365.

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