Question

Prepaid Insurance-Annual Adjustments On April 1, 2017, Stratton, Inc., purchases a 24-month property insurance policy for $96,000. The policy is effective immediately. Assume that Stratton prepares adjustments only once a year, on December 31. Required: 1. Compute the monthly cost of the insurance policy. per month 2. Identify and analyze the transaction to record the purchase of the policy on April 1, 2017 Activity Accounts Statement(s) Financing Investing Operating How does this entry affect the accounting equatid If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, le, a decrease, be sure to enter the answer with a minus sign. Balance Sheet Income Statem Stockholders' Assets Liabilities Equity Revenues 3. Identify and analyze the adjustment on December 31, 2017 Activity

Answer 1

Answer

1 Monthly cost of the Insurance Policy =$96000/24 months 4.000 Per Month 2 Analysis of transaction to record the policy on April 1, 2017 Activity Accounts Statement(s) Operating Prepaid insurance Increase, Cash decreases Balance Sheet Only Balance Sheet Income Statement Net Income Shareholder's Equity No entry Asset Prepaid Insurance $ Cash $ Liabilities No entry Expenses 96,000 -96,000 Revenue No entry No entry Analysis of transaction to record the policy on December 31, 2017 Activity Accounts Statement (s) Operating Prepaid insurance Decreases, Insurance expense Increases Balance Sheet & Income Statement Balance Sheet Income Statement Asset Prepaid Insurance $ Liabilities No Effect Shareholder's Equity Retained Earning $ -36.000 Revenue No entry Expenses Insurance expense $ Net Income $ -36.000 -36.000 36,000 Overstated Net income will be overstated by $36,000, because expense is understated by $36,000

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