Schrock Company debited Prepaid Insurance for $720 on July 1, 2013 for a one-yea

Question

Schrock Company debited Prepaid Insurance for $720 on July 1, 2013
for a one-year fire insurance policy. If the company prepares
monthly financial statements, failure to make an adjusting entry on
July 31, for the amount of insurance that has expired would cause

a. assets to be overstated by $720 and expenses to be understated by
$720.
b. expenses to be overstated by $60 and assets to be understated by
$60.
c. assets to be overstated by $60 and expenses to be understated by
$60.
d. expenses to be overstated by $720 and assets to be understated by
$720.

Explanation / Answer

c) 1/12 ($60) of the prepaid should be amortized to insurance expense.

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