Question

Question :The following data at July 31, 2018, are given for RCO: a. Depreciation, \(600. b. Prepaid rent expires, \)200. c. Interest expense accrued, \(700. d. Employee salaries owed for Monday through Thursday of a five-day workweek; weekly payroll, \)8,000. Unearned revenue earned, \(1,000. f. Office supplies used, \)150. Requirements 1. Journalize the adjusting entries needed on July 31, 2018. 2. Suppose the adjustments made in Requirement 1 were not made. Compute the overall overstatement or understatement of net income as a result of the omission of these adjustments

Short answer

Net income will be overstated by $7,050.

Step-by-step solution

Step-by-Step-SolutionStep1: Explanation on Adjusting Entries

Adjustries entries are used to record the accrued revenues and expenses at the end of the period.

Calculation of Overstatement of Net Inocme

Overstatement is calculated as follows:$$\begin{gathered} \mathbf{Overstatement}\mathbf{=}\mathbf{Depreciation}+\mathbf{RentExpense}+\mathbf{InterestExpense}+\mathbf{SalariesExpense} \\ +\mathbf{SuppliesExpense}-\mathbf{RevenueEarned} \\ \mathbf{=}\mathbf{\$}\mathbf{600}+\mathbf{\$}\mathbf{200}+\mathbf{\$}\mathbf{700}+\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{400}+\mathbf{\$}\mathbf{150}-\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{000} \\ \mathbf{=}\mathbf{\$}\mathbf{7}\mathbf{,}\mathbf{050} \end{gathered}$$

Thus, overstatement equals $7,050. $$\begin{gathered} \mathbf{Overstatement}\mathbf{=}\mathbf{Depreciation}+\mathbf{RentExpense}+\mathbf{InterestExpense}+\mathbf{SalariesExpense} \\ +\mathbf{SuppliesExpense}-\mathbf{RevenueEarned} \\ \mathbf{=}\mathbf{\$}\mathbf{600}+\mathbf{\$}\mathbf{200}+\mathbf{\$}\mathbf{700}+\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{400}+\mathbf{\$}\mathbf{150}-\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{000} \\ \mathbf{=}\mathbf{\$}\mathbf{7}\mathbf{,}\mathbf{050} \end{gathered}$$