Question

Dinosaur Junior Corporation purchased a one-year insurance policy in January 2013 for $60,000. The insurance policy goes into effect April 2013. If the company neglects to make the proper year-end adjustment for the expired insurance:

A. Net income and assets will be understated by $40,000.
B. Net income and assets will be overstated by $40,000.
C. Net income and assets will be understated by $20,000.
D. Net income and assets will be overstated by $20,000.

Answer 1

B. Net income and assets will be overstated by $40,000.

Step-by-step explanation:

given data

purchased 1 year insurance policy = $60,000

solution

we know that here policy have expired in

policy expired = 8 months

so here Expired insurance at year end as

Expired insurance at year end = $60,000 ×
`(8)/(12)`

Net income and assets overstated = $40,000

it is an expense and when not recognized then these both net income and assets will be overstated

so correct option is B. Net income and assets will be overstated by $40,000.