In: Accounting
Insurance premium for 5 years = $150000
Insurance premium for 1 year = $150000 / 5 = $30000
Excess Expenditure booked in year 2017 = $150000 - $30000 =
$120000
Therefore income understated by $120000 and tax on this would have
been $120000 x 30% i.e. $36000
Short Expenditure booked in year 2018 = $30000
Therefore income overstated by $30000, tax excess paid by $30000 x
30% i.e. $9000
Net Effect is Income understated by $120000 - $30000 = $90000
and tax paid short by $36000 - $9000 = $27000
and Retained Earnings Understated by $90000 - $27000 = $63000
Correcting Entry
Prepaid Insurance A/c Dr. $90000
Retained Earnings A/c Cr. $63000
Taxes Payable A/c Cr. $27000