2 On May 1 the next twelve months of rent was paid in advanc

2. On May 1, the next twelve months of rent was paid in advance for $1,200. For the adjusting journal entry (if there is one) the effect on each of the following of not recording the adj entry is: [Write O (Overstates), U (Understates), or NE (No Effect) next to each account type.] Asset: Liability: Revenue: Expense: Net Income:

Solution

Adjusting entry will be

Prepaid rent Dr. 1200

Rent expense Cr. 1200

If this entry is not recorded

Assets: understates (because prepaid rent will not be recorded)

Liabilities: NE (this transaction has no effect on liabilities)

Revenue: understates (revenue will decrease due to increase in expenses)

Expenses: overstates (prepaid expense will not be deducted)

Net income: understates (due to increased expenses)