A company records the fees for legal services paid in advance by its clients in an account called Unearned Legal Fees. If the company fails to make the end-of-period adjusting entry to record the portion of these fees that has been earned on effect will be

An understatement of equity T/F

T

Explanation:

At the end of each accounting year, the net income made is posted to the year end retained earnings thus increasing the shareholder's equity in the balance sheet.

When fees are received in advance,

Debit Cash account

Credit Unearned Legal Fees

when fees are earned

Debit Unearned Legal Fees

Credit Revenue

Thus, If the company fails to make the end-of-period adjusting entry to record the portion of these fees that has been earned on effect will be an understatement of revenue which will result in an understatement of net income and thus an understatement of equity.

True

True

Explanation:

Now the initial jounal entry of the Unearned Fees was recorded as:

Dr Cash received XX

Cr Unearned Fees XX ... Is a liability

Now the reason why the statement is true can be best explained from the following equation:

Equity = Ordinary Stock + (Revenue - Expense - Dividend)

Now just look at the above equation and the journal entry, the unearned fees increased the liability and if this amount is not waived off to the amount the unearned fees are converted to earnings, I mean if you have received the amount for 3 months services in advance and only one month services are delivered then the 1/3 part of the unearned fees will recognized as earned. If it is not complied then we can see in the above equation that the revenue would decrease and this decrease will decrease the equity.