Question

Berry Wills Corporation purchased a one-year insurance policy in January 2013 for $30,000. The insurance policy...

Berry Wills Corporation purchased a one-year insurance policy in January 2013 for $30,000. The insurance policy is in effect from April 1st, 2013 through March 31th, 2014. If the company neglects to make the proper year-end adjustment on Dec 31, 2013 for the expired insurance:

net income and assets will be overstated by $22,500 for year 2013

expense and liabilities will be understated by $22,500 for year 2013

net income and assets will be overstated by $25,000 for year 2013

expense and liabilities will be understated by $7,500 for year 2013
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Answer #1

Answer is - Net income and assets are overstated by $ 22,500 for year 2013

Adjusting entry for prepaid insurance(which is not made) shall be -

Debit insurance expense and credit prepaid insurance .

Debit of expense means increase in expense thus if debit of expense is not made net income will increase because expense are understated .

Credit of prepaid insurance(asset) means decrease in assets if credit is not made means assets are not decreased hence result in overstated assets .

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