Question

During December of Year 1, Nile Co. incurred special insurance costs but did not record these costs until payment was made during the following year. These insurance costs related to inventory that had been sold by December 31, Year 1. What is the effect of the omission on Nile’s accrued liabilities and retained earnings at December 31, Year 1?

Answer 1

Answer:

The omission of this entry understated accrued liabilites. given that the related inventory was sold in year 1, it aslo overstated net income and retained earnings by understating cost of goods sold,  the same effects would occur if the insurance costs were chargeable to expense as a period cost

Explanation:

Rules specify that contingent liabilities should be recorded in the accounts when it is probable that the future event will occur and the amount of the liability can be reasonably estimated. This means that a loss would be recorded (debit) and a liability established (credit) in advance of the settlement.