If a Company Fails to Adjust a Prepaid Rent Account

question 141

Multiple Choice

If a company fails to adjust a Prepaid Rent account for rent that has expired, what effect will this have on that month's financial statements?

• A)Failure to make an adjustment does not affect the financial statements.
• B)Expenses will be overstated and net income and stockholders' equity will be under- stated.
• C)Assets will be overstated and net income and stockholders' equity will be understated.
• D)Assets will be overstated and net income and stockholders' equity will be overstated.

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Definitions:

Compounded Quarterly

A method where interest earned is calculated and added to the principal amount every quarter, leading to interest on interest.

Future Value

The value of an investment at a specified future date, based on an assumed rate of growth over time.

Rate of Interest

The percentage at which interest is charged on a loan or earned on an investment over a specific period of time.

Mortgage Payment

A regular payment made to a lender that typically includes both interest and principal repayment on a mortgage loan.