2) ace manufacturing corporation purchased a one - year insurance policy in january 2024 for $36,000. the…
2) ace manufacturing corporation purchased a one - year insurance policy in january 2024 for $36,000. the insurance policy is in effect from march 2024 through february 2025. if the company neglects to make the proper december 31, 2024 year - end adjustment for the expired insurance f) net income and assets will be overstated by $30,000. g) net income and assets will be understated by $6,000. h) net income and assets will be overstated by $6,000. j) net income and assets will be understated by $30,000.
Answer
Explanation:
Step1: Calculate monthly insurance expense
The annual insurance cost is $36,000. So the monthly insurance expense is $\frac{36000}{12}=3000$.
Step2: Determine number of expired months in 2024
The policy starts in March 2024 and ends in February 2025. In 2024, the number of expired months from March - December is 10 months.
Step3: Calculate expired insurance expense in 2024
The expired insurance expense in 2024 is $3000\times10 = 30000$.
Step4: Analyze the impact of not making adjustment
If the company neglects to make the adjustment for the expired insurance, expenses are under - stated. Since expenses are under - stated, net income is over - stated. Also, prepaid insurance (an asset) is over - stated. The amount by which net income and assets are over - stated is the amount of the expired insurance expense, which is $30,000$.
Answer:
f) net income and assets will be overstated by $30,000.