MTEL Business Practice Exam

Correct Response: B. Failing to enter a deferral entry for expenses paid in advance will cause the earnings for the next period to be overstated. The prepaid expense will be recorded as an understated asset not an overstated liability (A). The net profit is the actual profit after costs and expenses are deducted, so the current period's net profit will be understated (C). Response D is incorrect because one cannot assume that the prepaid expense is for the production of cost of goods sold.