Question

During the adjusting process two transactions were neglected or omitted. The first is for unearned rent revenue of which $540 was earned during the period, the second was for accrued interest payable of which $225 is owed for the period. As a result of these omissions (A) assets are overstated by $540. (B) These omissions would not affect the financial statements; the financial statements will be correct.(C) liabilities are overstated by $315. (D) revenue is overstated by $765. (E) net income is overstated by $225.

Answer 1

Answer:

(E) net income is overstated by $225

Explanation:

With omitted income of $540 which is earned shall be added to revenue thus no with this revenue was understated.

Accrued interest payable is a liability to be recorded even if it is to be paid at a later date.

This is an expense to be recognized in Income Statement and a liability in balance sheet.

If not recognized means income is overstated with the same amount.

Net effect is -540 + 225 = $315 revenue understated

Since it is not in option correct option relevant is

(E) net income is overstated by $225.