Chapter 3, Problem 1MCQ

A company forgot to record accrued and unpaid employee wages of $350,000 at period-end. This oversight would

1. Understate net income by $350,000.
2. Overstate net income by $350,000.
3. Have no effect on net income.
4. Overstate assets by $350,000.
5. Understate assets by $350,000.

To determine

Accrued and unpaid wages:

These wages refer to those wages which are due but have not been paid off duly. Under the accumulation basis of accounting, the outstanding wages that have been earned should be entered as the wages expenditure and the wages payable or accumulated wages owed.

The effect of the missing record.

Explanation of Solution

Option b, overstate net income by $350,000, is correct.

b.

The rectifying adjustment entry to be recorded for the missing record of accrued and unpaid employee wages is to debit the wages expense and credit the wages payable. When this entry is made, the net income is overstated as the wages expense is a revenue statement account and wages payable is a current accountability account that is stated on the balance sheet.

a.

By the adjusting entry, the wages expense is debited and the wages payable is credited. This would result in the overstating of the net income not understating it.

c.

The wages expense records a debit balance and wages payable a credit balance. The wages payable is stated on the balance sheet and by this entry, the net income records an increase. Thus, it is wrong that there is no effect on the net income.

d.

The adjustment entry made to record the missing balance of accrued and unpaid employee wages is by debiting the wages expense and crediting the wages payable. This will not affect the assets. So, the assets will not be overstated.

e.

The adjustment entry made does not affect the balance of the assets as wages expense is an expense account and wages payable is a liability account. Thus, the assets are not understated.

Thus, option b is correct.