The prepaid insurance account had a balance of $12,000 at the beginning of the year

The prepaid insurance account had a balance of $12,000 at the beginning of the year. The account was debited for $18,000 for premiums on policies purchased during the year. Journalize the adjusting entry required at the end of the year for each of the following situations: (a) the amount of unexpired insurance applicable to future periods is $13,600; (b) the amount of insurance expired during the year is $16,400.

Answer:


a. Insurance Expense 16,400  Prepaid Insurance  16,400 Insurance expired ($12,000 + $18,000 – $13,600).    b. Insurance Expense 16,400  Prepaid Insurance  16,400 Insurance expired. 

At March 31, the end of the first month of operations, the usual adjusting entry transferring prepaid insurance expired

At March 31, the end of the first month of operations, the usual adjusting entry transferring prepaid insurance expired to an expense account is omitted. Which items will be incorrectly stated, because of the error, on (a) the income statement for March and (b) the balance sheet as of March 31? Also indicate whether the items in error will be overstated or understated.

Answer:
a.  Insurance expense (or expenses) will be understated. Net income will be overstated.

b.  Prepaid insurance (or assets) will be overstated. Owner’s equity will be overstated.