13) acme supply corporation purchased a one - year insurance policy in february 2024 for $42,000. the…

13) acme supply corporation purchased a one - year insurance policy in february 2024 for $42,000. the insurance policy is in effect from march 2024 through february 2025. if the company neglects to make the proper december 31, 2025 year - end adjustment for the expired insurance a) net income and assets will be overstated by $7,000. b) net income and assets will be understated by $7,000. c) net income and assets will be overstated by $35,000. d) net income and assets will be understated by $35,000.

13) acme supply corporation purchased a one - year insurance policy in february 2024 for $42,000. the insurance policy is in effect from march 2024 through february 2025. if the company neglects to make the proper december 31, 2025 year - end adjustment for the expired insurance a) net income and assets will be overstated by $7,000. b) net income and assets will be understated by $7,000. c) net income and assets will be overstated by $35,000. d) net income and assets will be understated by $35,000.

Answer

Explanation:

Step1: Calculate monthly insurance expense

Monthly expense = $\frac{42000}{12}=3500$

Step2: Calculate expired insurance from March - December 2024

Number of months from March - December 2024 is 10. Expired insurance = $3500\times10 = 35000$

Step3: Analyze the impact of not making adjustment

If the company doesn't make the adjustment, prepaid insurance (an asset) will be over - stated and insurance expense will be under - stated. Since insurance expense is under - stated, net income will be over - stated by the amount of the expired insurance which is $35000$. Also, assets (prepaid insurance) will be over - stated by $35000$.

Answer:

c) net income and assets will be overstated by $35,000.