[fabulucious]

Corporation purchases a one year policy in January 2011 for $66,000. The policy is in effect from March 2011 through February 2012. If the neglects to make the year end adjustment for the expired insurance is the net income and the asset over or understated?

[pready]

You need to know how the original insurance policy was recorded and what the adjusting entry would be to record the expired insurance (insurance used during the period) so that you analyze what the effect of not doing the adjusting entry has on your financials.

This type of problem is used so you can understand how entries flow through your financial statements.

[fabulucious]

The original policy was purchased in January 2011 for $66,000 and the beginning date was March 2011 to February 2012. My question was what would the results be for the net income and assets should the corporation neglect to record the year end adjustment for insurance be overstated or understated and what amount? Not sure how to get the answer for this problem.

[pready]

Your original entry would be a Debit to Prepaid Insurance(Asset) and a Credit to Cash(Asset).

The adjusting entry should be a Debit to Insurance Expense(Expense) and a Credit to Prepaid Insurance(Asset).

By not recording the adjusting entry you are missing an expense, so your expenses are understated. Since your expenses are understated your net income will be overstated. Since net income is overstated your retained earnings is overstated, which means that owners equity is overstated.

Also by not recording the adjusting entry you are missing a deduction to Prepaid assets, which means your assets are overstated.

Like I said in my previous post you have to know what the original entry and the adjusting are, so you can analyze the effects. Also you need to know how the effects of not recording an entry flow through the financial statements.