(Evaluating the effect that not recording adjusting entries has on net income, LO 4,5) For each of the following situations, indicate whether not recording the necessary adjusting entry will result in (i) an overstatement of net income (net income is higher than it would otherwise be), (ii) an understatement of net income (net income is lower than it would otherwise be), or (iii) no effect on net income. Provide an explanation for your conclusion.

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Effect on Net Income Explanation Wages earned by employees in the last week of the year but not paid until next year are ignored. a. Amortization expense is not recorded. b. Interest earned on an investment but not receivable until next year is not recorded. C. A property owner records four months' rent received in advance as unearned revenue. The property owner does not make an adjust- ment at the end of the year for the two months that the tenant has used the space. d. A company purchases a two-year insurance policy on the first day of the year and records the purchase as prepaid insurance. At the end of the year no adjustment is made to reflect the portion of the policy that was consumed. e. Interest on a loan that is incurred but is not payable until next month is not recorded. Overstatement The adjusting entry would record a wage expense and a wages payable liability. Therefore, by not making the necessary entry, expenses will be understated and liabilities understated.