Question

Dinosaur Junior Corporation purchased a one-year insurance policy in January 2013 for $60,000. The insurance policy goes into effect April 30, 2013. If the company neglects to make the proper year-end adjustment for the expired insurance:_________

Answer 1

Answer:

Net income and the assets will be overstated by the amount of $40,000

Explanation:

On purchasing the insurance, the accounts which got affected are the Net income as as the net income will decrease because the cash is paid against the insurance. And the assets will be affected on buying the insurance.

If the company neglects to make proper adjustment for the insurance, it will lead to overstated balance of the assets account as well as the net income of the company with the balance of $40,000 because it came in effect on April 30.

Working:

Amount = $60,000 / 12

= $5,000

For 4 months,it will be:

= $5,000 × 4

= $20,000