8 pt X Company prepares monthly financial statements. It rents space in a large

Question

8 pt X Company prepares monthly financial statements. It rents space in a large office complex. On May 1, it paid rent May and June. The accountant madie 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? 11.AO Total equities on May 31 were understated; total expenses for May were understated. BO Total equities on May 31 were overstated; total expenses for May were understated. CO Total equities on May 31 were cortect; total expenses for May were overstated. DO Total equities on May 31 were overstated; total expenses for May were overstated. EO Total equities on May 31 were understated; total expenses for May wore overstated. FO Total equities on May 31 were correct,; total expenses for May were understated.

Explanation / Answer

On first of May 1 , Rent is paid for the month of May and June. but the adjustement is not done at the month end it means the rent paid for two month is recorded as expense in the may month itselt. Show the rent expensnes will be recorded in the month of May for the two months that is for May and june.

But in actuality there should be one months rent (June) will be shown as prepaid expenses becuase it pays in advance. So When we record the more expenses in any month then our profit of the that month will be go down and it will reduce the our equities balance (Retained Raening).

So in the given case expenses is heigher recorded and Equities are lower due to this.

So, Answer = Option E = Total Equities on May 31 were understated; Total Expenses for May were overstated

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