1a. On April 1, 2017, Hughes Corp pays $240,000 for a one-year insurance policy
ID: 2541296 • Letter: 1
Question
1a. On April 1, 2017, Hughes Corp pays $240,000 for a one-year insurance policy that is effective immediately and expires one year later on March 31, 2018. Show the journal entry on April 1.
1b. Show the adjusting journal entry that Hughes makes on June 30th the end of the quarter.
1c. If Hughes' accountant forgot to make the above adjusting entry, what is the effect of this omission on the reported financial statements? On Each line, write either Overstated, Understated, or No Effect. (Explain why)
Revenues ________
Expenses ________
Net income ______
Assets ________
Liabilities _______
Owners Equity ________
Explanation / Answer
The amount of 240,000 is for a year and proportionate amount for 3 months is 240,000*3/12 = 60,000.
By passing above entry, expenses is increased by 60,000 and Assets(prepaid insurance) decreased by 60,000.
Effect of omission of the reported financial statements:
Revenues: No effect, as the entry is not involving any revenue accounts
Expenses: Understated, by not recording the entry an expense is omitted, hence understated.
Net income: Overstated, by not recording expenses, net income increases.
Assets: Overstated, if the entry has been passed, the prepaid insurance could have been decreased, by not doing so assets are overstated.
Liabilities: No effect, as the entry involves no liability accounts.
Owners equity: Overstated, as net income is over stated, consequentially owners equity gets over stated.
*Please comment, if further explanation is required. Your rating is appreciated*
Date Account Debit Credit June 30, 2017 Insurance expense $ 60,000.00 Prepaid insurance $ 60,000.00 [Entry to record insurance expense for the quarter]Related Questions
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