At year-end it was forgotten to adjust the asset prepaid rent for the $5,000 rent expense used up during the year. This will result in an:
A) overstatement of assets, profit, and equity.
B) understatement of assets and an overstatement of profit and equity.
C) understatement of assets, profit, and equity.
D) overstatement of liabilities and an understatement of profit and equity.

Question

Quizplus · Accepted Answer

Failing to adjust the prepaid rent for the rent expense used up during the year means the prepaid rent asset remains too high (overstated), as the expense that should have reduced it was not recognized. This also leads to profit being overstated because an expense that should have been recognized was not, and as a result, equity is overstated because profit contributes to equity.

At Year-End It Was Forgotten to Adjust the Asset Prepaid