8 ptX Company prepares monthly financial statements. It rents space in a large o

Question

8 ptX Company prepares monthly financial statements. It rents space in a large office complex. On May 1, it paid rent for May and June. The accountant made the proper entry on May 1 but failed to make the proper adjusting entry on May 31. What was the effect on the May financial statements? 13.AO Total equities on May 31 were understated; total expenses for May were overstated. BO Total (qnities on May 31 were understated; total expenses for May were und(rstated. CO Total eqies on May 31 were overstated; total expenses for May were understated DO Total equities on May 31 were overstated; total expenses for May were overstated EO Total equities on May 31 were corect; total expenses for May were understated FO Total uities on May 31 were correct; total expenses for May were overstated

Explanation / Answer

The correct answer is Option (D) i.e. Total equities on May 31 were overstated; total expense for May were overstated.

May 1 Prepaid Rent (Dr.)

Cash (Cr.)

May 31 No entry made

Hence, if the accountant would have shown the above entry at May 31, then entry would have been

May 31 Rent Expense (Dr.)

Prepaid Rent (Cr.)

May 31 Profit & loss (Dr.)

Rent expense (Cr.)

Now, Rent expense would have decreased, but since the entry not made, hence it got overstated.

Ans, Total entry would have decreased, but since the entry not made, hence it got overstated.

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