Question

On October 1 of Year 1 Wilburn Company paid cash for an insurance policy that would provide protection for a one year term. Which of the following shows how the required adjusting entry on December 31, Year 1 will affect Wilburn's financial statements?

A. Balance Sheet Income Statement Statement of Cash Flows

Assets = Liab. + Equity Rev. − Exp. = Net Inc.
− NA − NA NA NA −OA

B. Balance Sheet Income Statement Statement of Cash Flows

Assets = Liab. + Equity Rev. − Exp. = Net Inc.
− NA − NA + − NA

C. Balance Sheet Income Statement Statement of Cash Flows

Assets = Liab. + Equity Rev. − Exp. = Net Inc.
NA NA NA NA + − −OA

D. Balance Sheet Income Statement Statement of Cash Flows

Assets = Liab. + Equity Rev. − Exp. = Net Inc.
NA NA NA NA NA NA NA

Answer 1

The adjusting entry on December 31, Year 1 will affect Wilburn Company's balance sheet and income statement, but not the statement of cash flows.

Step-by-step explanation:

The adjusting entry for the insurance policy on December 31, Year 1 will affect Wilburn Company's financial statements as follows:

• Balance Sheet: The entry will decrease the current asset Insurance Prepaid and increase the current liability Insurance Payable.
• Income Statement: The entry will recognize an expense in the form of Insurance Expense, reducing Net Income.
• Statement of Cash Flows: The entry will not affect the statement of cash flows, as it does not involve any cash transactions.