Question

On March 1, Retro Inc. reported a balance in Supplies onf $200. During March, the company purchased supplies for $950 and consumed supplies of $800. If no adjusting entry is made for supplies
a. stockholer's equity will be overstated by $800.
b. assets will be understated by $350.
Why the answer is (a)? and why (b) is wrong answer?

Answer 1

Answer:

stockholer's equity will be overstated by $800.

Explanation:

The adjustment required is to record $800 of supplies used as an expense, hence, by carrying out the adjustment, net income is overstated by $800 so also retained earnings and shareholders' equity.

In other words,the balance that would be left in supplies is opening balance of $200 plus purchase of supplies which is $950 minus the supplies used.

balance of supplies=$200+$950-$800=$350

Option B is wrong the balance expected is $350 and the balance without adjustment is $200,that is $150 understatement not $350