Question

McMasters Corporation purchased a one-year insurance policy on March 1 of the current year for $30,000. The insurance policy will be in effect from March 1 through February 28 of the next year. The company recorded the payment as prepaid Insurance. The company neglects to record the year-end adjusting entry at the end of the current year. As a result, the company’s current year net income and assets will be overstated by ________.

Answer 1

$25,000

Step-by-step explanation:

As provided the insurance policy will be in effect from March 1 to February 28

Now this will result in advance payment for January and February for next year, that shall be accounted as expense for that period only, and currently will be accounted as an asset.

Therefore, amount paid of $30,000 for 12 months, shall be charged for 10 months in current year, and for 2 months in upcoming next year.

The amount related to next year expense = ($30,000/12)
`*` 2 = $5,000

Now that the remaining $30,000 - $5,000 = $25,000 shall be charged to expense of the current year. As not charge to expense this amount will overstate the income.

Thus, income for the year is overstated by $25,000.