True North Real Estate Management forgot to adjust its Deferred Rent Revenue account for the $15,000 that had been earned during the current year. What effect does this omission have on the current year financial statements?

Question

True North Real Estate Management forgot to adjust its Deferred Rent Revenue account for the​ $15,000 that had been earned during the current year. What effect does this omission have on the current year financial​ statements?

BlackTom AI · Accepted Answer

First, let’s restate the scenario to ensure clarity: Deferred Rent Revenue is a liability account that represents rent received in advance and not yet earned. When the company earns that rent during the current year, the proper adjusting entry would decrease the liability (debit Deferred Rent Revenue) and increase revenue (credit Rent Revenue).

Option 1: "Revenues are overstated by $15,000." If the company earned the rent but did not adjust, you would expect revenues to be understated, not overstated, because the earned portion should be recognized as revenue. Therefore this option is incorrect.

Option 2: "Liabilities are overstated by $15,000." This aligns with the accounting effect of not reducing the Deferred Rent Revenue liability when the rent has been earned. Since the earned portion should reduce the liability, failing to adjust leaves the liability balance $15,000 higher than it should be. This option is consistent with the described omission.

Option 3: "Assets are understated by $15,000." There is no immediate asset impact from failing to adjust Deferred Rent Revenue for earned rent; the entry affects liabilities and revenues (and ultimately net income), not asset totals directly. Hence this option is incorrect.

Option 4: "Expenses are understated by $15,000." Earned rent is revenue, not an expense, so omitting the adjustment does not directly affect expenses. Therefore this option is incorrect.

To summarize the core effect: recognizing earned rent would decrease a liability (Deferred Rent Revenue) and increase revenue. Skipping that adjustment keeps the liability inflated by the amount earned, which means liabilities are overstated by $15,000. The other options misstate where the impact occurs or mischaracterize the nature of rent when earned.

True North Real Estate Management forgot to adjust its Deferred Rent Revenue account for the $15,000 that had been earned during the current year. What effect does this omission have on the current year financial statements?单项选择题

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True North Real Estate Management forgot to adjust its Deferred Rent Revenue account for the​ $15,000 that had been earned during the current year. What effect does this omission have on the current year financial​ statements?单项选择题