If an entry to adjust unearned rent and rent revenue is not recorded at the end of the period, Rent Revenue and Net Income on the income statement will be

a. unaffected because these items are not on the income statement.

b. unaffected because the omitted entry affects two accounts that cancel each other out.

c. understated.

d. overstated.

Question

Business

Jared

26 July, 20:34

If an entry to adjust unearned rent and rent revenue is not recorded at the end of the period, Rent Revenue and Net Income on the income statement will be

a. unaffected because these items are not on the income statement.

b. unaffected because the omitted entry affects two accounts that cancel each other out.

c. understated.

d. overstated.

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Answers (1)

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Dawson Barr · Answer 1

c. understated.

Explanation:

Unearned rent usually comes to bear where cash or other forms of consideration has been received in advance for rental income.

When this happens, the entries to be posted are a debit to cash account and a credit to unearned rent.

When the rent is earned during the year, the entries will be a debit to unearned rent (balance sheet item) and a credit to rent revenue (in the p/l).

The recognition of the rent revenue results in an increase in net income.

As such, if unadjusted, rent revenue and net income would be understated.

Option c.