Question

In making adjusting entries at the end of its accounting period, Chao Consulting mistakenly forgot to record:

∙ \(3,200 of insurance coverage that had expired (this \)3,200 cost had been initially debited to the Prepaid

Insurance account).

∙ \(2,000 of accrued salaries expense.

As a result of these oversights, the financial statements for the reporting period will [choose one] (1) understate

assets by \)3,200; (2) understate expenses by \(5,200; (3) understate net income by \)2,000; or

(4) overstate liabilities by $2,000.

Short answer

Answer:

Option 2 is correct, understate expenses by $5,200

Step-by-step solution

Definition of accrued salaries

When salaries are due but not paid, this is known as accrued salaries.

Reporting of expenses

In the given situations, expenses are increased by $5,200; hence, according to rules, whenever expenses increase, we understate the expenses by $5,200.