What is the effect on the financial statements when a company fails to adjust the prepaid insurance expense account at year-end for insurance coverage that has been used?
A)Net income is overstated and stockholders' equity is understated.
B)Expenses are understated and stockholders' equity is understated.
C)Expenses are understated and net income is understated.
D)Net income is overstated and assets are overstated.

Question

Quizplus · Accepted Answer

If the prepaid insurance expense account is not adjusted at year-end for insurance coverage that has been used, then assets will be overstated (as the prepayment will still be recorded) and net income will be overstated (as the expense for the insurance coverage used will not be recognized). This is because the company will have recorded the prepaid insurance as an asset, but will not have recognized the amount that corresponds to the insurance coverage that has been used as an expense, resulting in an overstatement of both assets and net income.

What Is the Effect on the Financial Statements When a Company