On November 1, 20X3, your calendar year company receives $40,000 for space it is
ID: 2536788 • Letter: O
Question
On November 1, 20X3, your calendar year company receives $40,000 for space it is subletting for 5 months (November 1, 20X3 through March 31, 20X4). The $40,000 was recorded as revenue. On December 31, 20X3, you discover that an adjusting entry was never made. If you fail to make the correcting entry, liabilities will be understated and net income will be understated liabilities will be overstated and net income will be overstated liabilities will be understated and net income will be overstated liabilities will be overstated and net income will be understated the financial statements will be accurate because an adjusting entry was not necessary
Explanation / Answer
Answer
Amount received on 1 Nov, 20X3
Amount received for 5 months [Nov to Mar]
Entry posted (Wrong entries)
Correct entries that should have been posted
Date
General Journal
Debit
Credit
General Journal
Debit
Credit
1 Nov 20X3
Cash
$ 40,000.00
Cash
$ 40,000.00
Rental Revenue
$ 40,000.00
Unearned Rent Revenue
$ 40,000.00
31 Dec 20X3
No entry
Unearned Rent Revenue
$ 16,000.00
Rent Revenue [40000 x 2months/5months]
$ 16,000.00
Liabilities Understated (by $ 24,000: amount of Unearned revenue - for 3months), and
Net Income Overstated (by $ 24,000: $40000 - $16000)
Entry posted (Wrong entries)
Correct entries that should have been posted
Date
General Journal
Debit
Credit
General Journal
Debit
Credit
1 Nov 20X3
Cash
$ 40,000.00
Cash
$ 40,000.00
Rental Revenue
$ 40,000.00
Unearned Rent Revenue
$ 40,000.00
31 Dec 20X3
No entry
Unearned Rent Revenue
$ 16,000.00
Rent Revenue [40000 x 2months/5months]
$ 16,000.00
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