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.

Question

Business

Sidney Hunter

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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Melanie Avila · Answer 1

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.