Question

On July 1, Morris Company paid $17,400 for two years of insurance in advance. Morris debited Prepaid Insurance. If the appropriate adjusting entry is not made at the end of the year, what will be the effect on?

Answer 1

The effect shall be an understatement of expenses and overstatement of net income. The impact shall be $ 4,350.

Step-by-step explanation:

The expired portion of prepaid insurance i.e 6 months from July 01 to year end needs to be adjusted. The adjustment amount shall be $ 4,350. calculated as under:

Prepaid Insurance $ 17,400

Period of benefit 24 months.

Adjustment for prepayment : 17400/24*6 = $ 4,350

The effect of not passing the entry would be an understatement of expenses and overstatement of net income