Questions: For the year ended December 31, Orion, Inc. mistakenly omitted adjusting entries for 1,500 of supplies that were used, (2) unearned revenue of 4,200 that was earned, and (3) insurance of 5,000 that expired. For the year ended December 31, what is the effect of these errors on revenues, expenses, and net income? a. Expenses are overstated by 6,500. b. Net income is overstated by 2,300. c. Expenses are understated by 3,500. d. Revenues are overstated by 4,200.

The answer is C: Expenses are understated by \$3,500.

Let's break down each of the omitted adjusting entries and their effects on revenues, expenses, and net income:

1. Supplies Used (\$1,500):

   • Supplies expense should have been increased by \$1,500.
   • Since this entry was omitted, expenses are understated by \$1,500.

2. Unearned Revenue Earned (\$4,200):

   • Revenue should have been increased by \$4,200.
   • Since this entry was omitted, revenues are understated by \$4,200.

3. Insurance Expired (\$5,000):

   • Insurance expense should have been increased by \$5,000.
   • Since this entry was omitted, expenses are understated by \$5,000.

Now, let's analyze the overall effect on expenses, revenues, and net income:

• Expenses:

  • Understated by \$1,500 (supplies) + \$5,000 (insurance) = \$6,500.

• Revenues:

  • Understated by \$4,200 (unearned revenue earned).

• Net Income:

  • Net income is calculated as Revenues - Expenses.
  • Since revenues are understated by \$4,200 and expenses are understated by \$6,500, the net effect on net income is:
    • Net income is understated by \$4,200 (revenues) - \$6,500 (expenses) = -\$2,300.
    • This means net income is actually overstated by \$2,300 because the expenses were not recorded.

Given these calculations, the correct answer is: C. Expenses are understated by \$3,500.

Explanation for other options:

• a. Expenses are overstated by \$6,500: Incorrect. Expenses are actually understated by \$6,500.
• b. Net income is overstated by \$2,300: Incorrect. This is the net effect, but the question specifically asks about the effect on expenses.
• d. Revenues are overstated by \$4,200: Incorrect. Revenues are understated by \$4,200.