Question

If a company failed to make the end-of-period adjustment to move the amount of management fees that were earned from the Unearned Management Fees account to the Management Fees Revenue account, this omission would cause:a. An overstatement of net income. b. An overstatement of assets. c. An overstatement of liabilities. d. An overstatement of equity. e. An understatement of liabilities.

Answer 1

Answer:

c. An overstatement of liabilities.

Explanation:

To account for management fees unearned but received, the following entries may be required;

Debit Cash account

Credit  Unearned/Deferred Management Fees

Being entries to recognize unearned management fees.

When the fees are earned, the necessary entries are;

Debit Unearned/Deferred Management Fees

Credit Revenue (Management Fees) (P/L)

Being entries to recognize management fees earned during the period. Failure to post the second entry would result in an overstatement of Unearned/Deferred Management Fees which is an overstatement of liabilities.