Effect of Omitting Adjusting Entry At March 31, the end of the first month of op

Question

Effect of Omitting Adjusting Entry At March 31, the end of the first month of operations, the usual adjusting entry transferring prepaid insurance expired to an expense account is omitted. Which items will be incorrectly stated, because of the error, on (A) the income statement for March and (B) the balance sheet as of March 31? Also indicate whether the items in error will be overstated or understated. a. Income Statement Insurance Expense Net Income b. Balance Sheet Prepaid Insurance Stockholders' Equity

Explanation / Answer

Effect on items :

a) Income statement Insurance expense Understated Net income Overstated b) Balance sheet Prepaid insurance Overstated Stockholder's equity Overstated

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