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Financial Accounting

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Missing Adjusting Entries: Impact on Income Statement

FINACT-XEYWHM

At year end, Fashionista Inc. prepared an Income Statement, showing Net Income of \$35,000, and a Balance Sheet, showing total assets of \$250,000. Unfortunately, they failed to include two adjusting journal entries before making these financial statements.

(1) \$1,500 of Unearned Revenue was earned in the last month of the year.
(2) Rent of \$2,400 was paid in advance for the month after year end. The entire amount paid was debited to Rent Expense.

What is the effect of these two errors on the Net Income reported in the Income Statement?

A

Net Income is overstated by \$3,900.

B

Net Income is understated by \$3,900.

C

Net Income is overstated by \$900.

D

Net Income is understated by \$900.