Question

1a. On April 1, 2017, Hughes Corp pays $240,000 for a one-year insurance policy that is effective immediately and expires one year later on March 31, 2018. Show the journal entry on April 1.

1b. Show the adjusting journal entry that Hughes makes on June 30th the end of the quarter.

1c. If Hughes' accountant forgot to make the above adjusting entry, what is the effect of this omission on the reported financial statements? On Each line, write either Overstated, Understated, or No Effect. (Explain why)

Revenues ________

Expenses ________

Net income ______

Assets ________

Liabilities _______

Owners Equity ________

Answer 1

The amount of 240,000 is for a year and proportionate amount for 3 months is 240,000*3/12 = 60,000.

Date	Account	Debit	Credit
June 30, 2017	Insurance expense	$ 60,000.00
	Prepaid insurance		$ 60,000.00
	[Entry to record insurance expense for the quarter]

By passing above entry, expenses is increased by 60,000 and Assets(prepaid insurance) decreased by 60,000.

Effect of omission of the reported financial statements:

Revenues: No effect, as the entry is not involving any revenue accounts

Expenses: Understated, by not recording the entry an expense is omitted, hence understated.

Net income: Overstated, by not recording expenses, net income increases.

Assets: Overstated, if the entry has been passed, the prepaid insurance could have been decreased, by not doing so assets are overstated.

Liabilities: No effect, as the entry involves no liability accounts.

Owners equity: Overstated, as net income is over stated, consequentially owners equity gets over stated.

*Please comment, if further explanation is required. Your rating is appreciated*