Question

Effect of Omitting Adjustments For the year ending April 30, Mann Medical Services Co. mistakenly omitted adjusting entries for (1) $9,200 of supplies that were used, (2) unearned revenue of $12,000 that was earned, and (3) insurance of $2,500 that expired. Indicate the combined effect of the errors on (a) revenues, (b) expenses, and (c) net income for the year ended April 30. (a) Revenues understated $ (b) Expenses $ (c) Net income $

Answer 1

Answer:

(a) Revenues overstated $12,000

(b) Expenses understated  $11,700

(c) Net income overstated $300

Explanation:

First prepare the journal entries pertaining to the omitted adjusting entries as follows;

Entry 1

Supplies Expense $9,200 (debit)

Supplies $9,200 (credit)

Entry 2

Revenue $12,000 (debit)

Unearned Revenue $12,000 (credit)

Entry 3

Insurance Expense $2,500 (debit)

Prepaid Insurance $2,500 (credit)

Then consider the Effects on the named Accounts

Expenses.

Affected by Entry 1 and Entry 3

Expenses are understated by $11,700

Revenues.

Affected by Entry 2.

Revenues are overstated by $12,000

Net Income

Affected by Entries 1, 2, 3 also the net effect of the two items above.

Income is overstated by $300