On November 1, 20X3, your calendar year company receives $40,000 for space it is

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 a liability. On December 31, 20X3, you discover that an adjusting entry was never made. If you fail to make the correcting entry, the financial statements will be accurate because an adjusting entry was not necessary liabilities will be understated and net income will be overstated liabilities will be overstated and net income will be overstated liabilities will be understated and net income will be understated liabilities will be overstated and net income will be understated

Explanation / Answer

The $40000 has been received for 5 months i.e. November 2013 to March 2014. If the adjusting entry is not made , the income of ($8000*2)=$16000 for November and December will not be recognized. Thus, the liabilities will be overstated and the net income will be understated.

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