In preparing its adjusting entries at the end of this year, Filiberto Company neglected to adjust the Unearned Service Fees account for the amount of such fees earned during the year.
This error
A) Understates this year's net income and retained earnings at year-end and overstates liabilities at year-end
B) Overstates this year's net income and retained earnings at year-end and understates liabilities at year-end
C) Understates this year's net income and understates both retained earnings and liabilities at year-end
D) Overstates this year's net income and overstates both retained earnings and liabilities at year-end
E) None of the above

Question

Quizplus · Accepted Answer

Neglecting to adjust the Unearned Service Fees account for the amount of fees earned during the year means that revenue that should have been recognized is not, leading to an understatement of net income and retained earnings. Additionally, liabilities are overstated because the Unearned Service Fees account (a liability) is not decreased by the amount of fees earned.

In Preparing Its Adjusting Entries at the End of This