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21 May, 12:56

If a company failed to make the end-of-period adjustment to move the amount of management fees that were earned from the Unearned Management Fees account to the Management Fees Revenue account, this omission would cause:a. An overstatement of net income. b. An overstatement of assets. c. An overstatement of liabilities. d. An overstatement of equity. e. An understatement of liabilities.

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  1. 21 May, 15:06
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    c. An overstatement of liabilities.

    Explanation:

    To account for management fees unearned but received, the following entries may be required;

    Debit Cash account

    Credit Unearned/Deferred Management Fees

    Being entries to recognize unearned management fees.

    When the fees are earned, the necessary entries are;

    Debit Unearned/Deferred Management Fees

    Credit Revenue (Management Fees) (P/L)

    Being entries to recognize management fees earned during the period. Failure to post the second entry would result in an overstatement of Unearned/Deferred Management Fees which is an overstatement of liabilities.
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