Question

Smith Corporation purchased a one-year insurance policy in January 2020 for $48,000. The insurance policy is in effect from March 1, 2020 through February 28, 2021. If the company neglects to make the proper year-end adjustment for the expired insurance: net income and assets will be understated by $35,000. net income and assets will be overstated by $35,000. net income and assets will be understated by $7,000. O net income and assets will be overstated by $40,000.

Answer 1

Unexpired Insurance at the end of Dec31, 2020
Total Insurance premium paid			48,000
Less: Expired for 10 months (48,000*10/12)	40,000
Unexpired Insurance at the end of Dec 31, 2020	8,000
Adjusting entry shall be:
S.no.	Accounts title and explanation		Debit $	Credit $
a.	Insurance expenses			40,000
	Prepaid insurance				40,000
	(for insurance expired for 10 months)
The ommission of above entry is having the effect of increasing the balance of Prepaid insurance by $40,000.
and decreasing the balance of Insurance expense by $40,000 resulting in the increase in net income.
Answer is Net income and assets will be overstated by $ 40,000.