Question & Answer: Effect of omitting adjusting entry At March 31, the end of the first month of operations, the usual adjusting entry tra…..

EX 3-5 Effect of omitting adjusting entry At March 31, the end of the first month of operations, the OBJ. 2, 3 usual adjusting entry trans- ng prepaid insurance expired to an expense account is omitted. Which items wil 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.

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.

Expert Answer

Items incorrectly stated	Overstated or Understated

a. Income Statement

Insurance Expense	Understated
Net Income	Overstated

b. Balance Sheet

Prepaid Insurance	Overstated
Stockholders’ Equity	Overstate

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