At March 31, the end of the first month of operations, the usual adjusting entry transferring prepaid insurance expired to an expense account is omitted. Which items will be incorrectly stated, because of the error, on (A) the income statement for March and (B) the balance sheet as of March 31?

Question

Business

Joaquin Oconnell

11 September, 15:26

At March 31, the end of the first month of operations, the usual adjusting entry transferring prepaid insurance expired to an expense account is omitted. Which items will be incorrectly stated, because of the error, on (A) the income statement for March and (B) the balance sheet as of March 31?

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Danna Orr · Answer 1

Answer: The correct answers are A and B

Explanation: Both the income statement and the balance sheet would be misstated as at 31 March.

Prepaid insurance is a 12-month premium paid for insured assets, whose period has not expired.

A prepaid asset schedule is usually prepared and kept for monitoring and monthly amortization, if it is not automated. Normally at the end of each month, if the prepaid asset is not automated, the amortization charge entry is raised between prepaid asset and amortization charge by Debiting Amortization charge (expense) and Crediting Prepaid asset. With these adjusting entries, both the income statement and the balance sheet would be affected.