16) ace service inc. pays its rent of $60,000 annually on january 1 and makes monthly adjusting entries. if…

16) ace service inc. pays its rent of $60,000 annually on january 1 and makes monthly adjusting entries. if the february 28 monthly adjusting entry for prepaid rent is omitted, which of the following are true? f) assets will be overstated by $10,000 and net income and stockholders equity will be understated by $10,000. g) failure to make the adjustment does not affect the february financial statements. h) expenses will be overstated by $5,000 and net income and stockholders equity will be understated by $5,000. j) assets will be overstated by $5,000 and net income and stockholders equity will be overstated by $5,000

16) ace service inc. pays its rent of $60,000 annually on january 1 and makes monthly adjusting entries. if the february 28 monthly adjusting entry for prepaid rent is omitted, which of the following are true? f) assets will be overstated by $10,000 and net income and stockholders equity will be understated by $10,000. g) failure to make the adjustment does not affect the february financial statements. h) expenses will be overstated by $5,000 and net income and stockholders equity will be understated by $5,000. j) assets will be overstated by $5,000 and net income and stockholders equity will be overstated by $5,000

Answer

Explanation:

Step1: Calculate monthly rent expense

The annual rent is $60,000. The monthly rent expense is $\frac{60000}{12}=5000$.

Step2: Analyze the impact of omitting the adjusting - entry

The adjusting entry for prepaid rent would debit rent expense and credit prepaid rent. If the entry is omitted, rent expense is under - stated by $5000$ for February. Since expenses are under - stated, net income is over - stated by $5000$. Also, prepaid rent (an asset) is over - stated by $5000$ because the reduction in prepaid rent due to the expense recognition is not recorded. And since net income is over - stated, stockholders' equity (which is affected by net income) is also over - stated by $5000$.

Answer:

j) Assets will be overstated by $5,000$ and net income and stockholders' equity will be overstated by $5,000$