Question

Stahl Company paid $7,800 on May 1, 2008 for insurance coverage for a one year period beginning that date. The adjusting entry required to recognize insurance expense on December 31, 2008 would have what effect on the financial statements? = = B) Assets (2.600) (2600) (5.200) (5.200) L inh NA NA NA NA + + + + + Equity (2,600) 2600) (5,200) (5,200) Rev. NA VA NA NA Exp. 2.600 2600 5.200 3.200 Net In (2,600) (2600) (5,200) (5,200) Cash Flow NA 600) OA (5.200) OA = - NA

Answer 1

	Date of Payment May 1 , 2008	$7,800
	Months expired in current year	8	Months
	Months remaining	4	Months
	Prepaid asset portion	$2,600	(7800/12*4)
	Expense portion	$5,200
	If on May 1, 2008 whole amount of $7,800 was charged to expense A/c then adjusting entry will made as follows:
	Prepaid expense Dr.	$2,600		(Asset increases)
	To, Income Statement		$2,600	(Income increases)
	Note: above adjusting entry will have no effect on actual cash flows.
	Hence, correct answer is option A on the above case. Option B is no correct as there is no cashflows involved.
	As per accounting equation, Liabilities + stockholders' equity = Assets
	Hence, common stock = 2,250+1,000+1,100+550-2,940
	Common stock = $ 1,960
	Note: revenue of 5550 and expense 2680 not considered as they must already credited to retained earnings account.