question 10\nregions inc. pays its rent of $60,000 annually on january 1 and makes monthly adjustments. if…

question 10\nregions inc. pays its rent of $60,000 annually on january 1 and makes monthly adjustments. if the february 28 monthly adjustment for prepaid rent is omitted, which of the following are true?\na assets will be overstated by $10,000 and net income and stockholders equity will be understated by $10,000.\nb expenses will be overstated by $5,000 and net income and stockholders equity will be understated by $5,000.\nc failure to make the adjustment does not affect the february financial statements.\nd assets will be overstated by $5,000 and net income and stockholders equity will be overstated by $5,000.

question 10\nregions inc. pays its rent of $60,000 annually on january 1 and makes monthly adjustments. if the february 28 monthly adjustment for prepaid rent is omitted, which of the following are true?\na assets will be overstated by $10,000 and net income and stockholders equity will be understated by $10,000.\nb expenses will be overstated by $5,000 and net income and stockholders equity will be understated by $5,000.\nc failure to make the adjustment does not affect the february financial statements.\nd 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

Annual rent is $60,000. Monthly rent = $\frac{60000}{12}=5000$.

Step2: Analyze the impact of not making adjustment

Pre - paid rent is an asset. When the adjustment for prepaid rent is omitted, the expense that should have been recognized ($5000$ for February) is not recognized. So expenses are understated. Net income is overstated because expenses are understated. Assets are overstated because the portion of prepaid rent that should have been reduced ($5000$) is not reduced.

Answer:

D. Assets will be overstated by $5,000 and net income and stockholders’ equity will be overstated by $5,000.