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When company recorded the adjusting entry for equipment depreciation $1,000, it incorrectly recorded a credit of accounts receivable for $1,000 and debit cash for $1,000
When company recorded the adjusting entry for equipment depreciation $1,000, it incorrectly recorded a credit of accounts receivable for $1,000 and debit cash for $1,000. Before correcting this error: Select one: a. Asset is understated and expense is overstated. b. Asset is overstated and expense is overstated. c. Asset is overstated and expense is understated. O d. Asset is understated and expense is understated. Next page
Expert Solution
Answer
- Correct Answer = Option ‘C’
Asset is overstated and Expense is understated. - Incorrect effect:
|
Assets |
Liability |
Stockholder's Equity |
|||
|
Cash |
$1,000 |
||||
|
Account receivables |
($1,000) |
||||
|
Net effect |
$0 |
Net effect |
$0 |
Net effect |
$0 |
- Correct treatment:
|
Assets |
Liability |
Stockholder's Equity |
|||
|
Accumulated Depreciation |
($1,000) |
Depreciation expense |
($1,000) |
||
|
Net effect |
($1,000) |
Net effect |
$0 |
Net effect |
($1,000) |
- Hence,
>Total assets should have been decreased by $ 1000, but due to error, the asset has not changed. Hence, these are overstated.
>Depreciation expense recording would have increased expenses. Hence dur to error, expenses are understated.
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