Question

87. Dinosaur Junior Corporation purchased a one-year insurance policy in January 2015 for $75,000. The insurance policy is in effect from May 2015 through April 2016. If the company neglects to make the proper year-end adjustment for the expired insurance A) net income and assets will be understated by $25,000. B) net income and assets will be understated by $50,000. C) net income and assets will be overstated by $25,000. D) net income and assets will be overstated by $50,000.

Answer 1

The correct answer is

D) net income and assets will be overstated by $ 50000.

Explanation

When insurance policy was taken it was debited to prepaid insurance. As year end adjustment has not been made, then the net income will be overstated as insurance expense was not booked from May 2015 to Dec 2015, due to which income is overstated by $ 50000 (75000*8/12) and prepaid insurance is also overstated by $ 50000, as it has not been adjusted, due to which assets are also overstated by $ 50000.