The auditors informed the company that the provision for long service leave was understated by $100 000 at 30 June 2016 and that the account should be adjusted.The company adjusted the account so that:
A) liabilities increase and profit decreases.
B) liabilities increase but profit is unaffected.
C) profit increases but there is no effect on liabilities.
D) there is no effect on either profit or liabilities.

Question

Quizplus · Accepted Answer

The provision for long service leave is a liability that represents the estimated future cost of paying long service leave to employees. When the provision is understated, it means that the liability has been underestimated and that the company will have to pay more than previously expected. By adjusting the account, the company is recognizing this increased liability, which will decrease the profit. Therefore, the correct answer is A.

The Auditors Informed the Company That the Provision for Long