Tacoma Corporation purchased a one-year insurance policy in January 2016 for $57000. The insurance policy is in effect from May 2016 through April 2017. If the company neglects to make the proper year-end adjustment for the expired insurance

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If Tacoma Corporation does not adjust for the expired insurance, the expenses will be understated, leading to an overstatement of net income. Similarly, prepaid insurance (an asset) will also be overstated because part of the policy has already been used. The policy was in effect for 8 months of the year (May through December), which is 8/12 of the $57,000 cost, equaling $38,000. Therefore, failing to adjust for this will result in both net income and assets being overstated by $38,000.

Tacoma Corporation Purchased a One-Year Insurance Policy in January 2016