During the adjusting process two transactions were missed. The first is for unearned rent revenue of which $450 was earned durin
g the period, the second was for accrued interest payable of which $275 is owed for the period. As a result of these omissions 1. liabilities are overstated by $725.
2. assets are overstated by $725.
3. net income is understated by $175.
4. revenue is overstated by $725.
There were two transactions omitted. The first transaction is unearned rent revenue of which $450 was earned. This earned rent revenue increases income by $450. While the second transaction was accrued interest payable of which $275 is owed. This interest payable increases liabilities by $275.
Therefore, from the above, income or revenue is understated by $450, while expenses is understated by $275.
Therefore, net income is understated by income less expenses, thus 450 - 275 = $175. This also implies that liabilities are overstated by $175.
In this specific scenario, the individual will have to pay a penalty of 50% tax on the amount not distributed as required. This is mainly due to the fact that traditional IRA accounts require that distribution of benefits must begin no later than age 70½ if immediate annuities are used to pay for them. Failure to do so would have a consequence of a 50% tax on the undistributed amount, and must be paid by the owner of the account.
