Question 1: Torri Company paid $6,350 to renew its only insurance policy for thr

Question

Question 1:

Torri Company paid $6,350 to renew its only insurance policy for three years on March 1, 2015, the effective date of the policy. At March 31, 2015, Torri's unadjusted trial balance showed a balance of $265 for prepaid insurance and $6,350 for insurance expense. What amounts should be reported for prepaid insurance and insurance expense in Torri's financial statements for the three months ended March 31, 2015? Hint: The price of the insurance premium increased in the current year. Round all answers to the nearest whole dollar.

Question 2:

Assume that net purchases were overstated $22,000 in 2014, the beginning merchandise inventory was understated $12,000 in 2014, operating expenses for 2015 were understated $2,500 and the ending merchandise inventory was overstated $7,000 in 2015. Assume that no corrections were made during 2014 or 2015. All other items in the income statement were correct.

a) What affect does this have on the gross profit and goods available for sale in the 2014 income statement; in dollars understated or overstated?

b) What affect does this have on net income and retained earnings in dollars understated or overstated for 2015?

Explanation / Answer

Answer 1

Answer 2

Insurance Expense for March 2015 Opening Prepaid Balance        265 Paid during the current year        176 ($6350/36*1) Insurance expense for 3 month period        441 Prepaid Insurance ($6350 - $ 176)    6,174

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