Question

on june 1, jenkins company paid $4,500 for one year of advertising in advance. jenkins debited prepaid advertising. the advertising expense will be used evenly throughout the year. if the appropriate adjusting entry is not made at the end of the year, what will be the effect on:

Answer 1

If the appropriate adjusting entry is not made at the end of the year, it will result in an overstatement of assets, an understatement of expenses, and an incorrect net income. An adjusting entry should be made to prevent these misstatements.

Step-by-step explanation:

If the appropriate adjusting entry for prepaid advertising is not made at the end of the year, it will have the following effect:

1. The expense for the unused portion of the prepaid advertising will not be recognized, resulting in an overstatement of assets and an understatement of expenses in the financial statements.
2. The net income for the year will be higher than it should be, as the expense for the unused portion of the prepaid advertising is not properly accounted for.
3. In the following year, when the advertising expense is recognized evenly throughout the year, it will be double-counted, resulting in an overstatement of expenses and an understatement of net income.

To prevent these misstatements, an adjusting entry should be made at the end of the year to recognize the unused portion of the prepaid advertising as an expense and reduce the prepaid advertising account accordingly.