Final answer:
Due to the lack of an adjusting entry for prepaid insurance, Lansing company's assets will be overstated, and its expenses will be understated on the year-end financial statements.
Step-by-step explanation:
The question involves an error in accounting related to prepaid insurance and its effect on the financial statements at year-end when no adjusting entry is made. When Lansing company paid $1,500 for a 12-month insurance policy on November 1, 2014, and increased the prepaid insurance account, they created an asset that should have been expensed over the period the insurance covers. Failing to make an adjusting entry to recognize the expense of the insurance that relates to the year ended December 31, 2014, would leave too much in the assets account (because no portion of the prepaid insurance has been expensed) and would understate expenses (because the insurance expense for those two months has not been recognized).
Therefore, the effect of Lansing company not making the adjusting entry is that assets will be overstated, and expenses will be understated, which in turn means net income will be overstated since expenses have not been properly recorded. This corresponds to option (D) Expenses will be understated, and assets will be overstated.