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QuestionCompany bought a 3-year insurance policy for $25,200\$25,200 on 1/4/20201/4/2020. Reported net income for 2020 was $63,000\$63,000. If the accountant missed the insurance adjustment on 12/31/202012/31/2020, the correct 2020 net income should be $56,700\$56,700.

Studdy Solution

STEP 1

Assumptions
1. The insurance policy was purchased on April 1, 2020, for a period of 3 years.
2. The full amount paid for the insurance policy was 25,200.<br/>3.Theamountwasdebitedtoprepaidinsuranceatthetimeofpurchase.<br/>4.Thenetincomereportedfortheyear2020was25,200.<br />3. The amount was debited to prepaid insurance at the time of purchase.<br />4. The net income reported for the year 2020 was 63,000.
5. The company closes its accounts on December 31 each year.
6. The accountant missed to prepare the adjusting entry for insurance on December 31, 2020.
7. The insurance expense needs to be allocated proportionally to each year of the policy.

STEP 2

Calculate the annual insurance expense by dividing the total cost of the insurance policy by the number of years the policy covers.
Annual insurance expense=Total insurance costNumber of yearsAnnual\, insurance\, expense = \frac{Total\, insurance\, cost}{Number\, of\, years}

STEP 3

Now, plug in the given values to calculate the annual insurance expense.
Annual insurance expense=$25,2003 yearsAnnual\, insurance\, expense = \frac{\$25,200}{3\, years}

STEP 4

Calculate the annual insurance expense.
Annual insurance expense=$25,2003=$8,400Annual\, insurance\, expense = \frac{\$25,200}{3} = \$8,400

STEP 5

Since the policy was purchased on April 1, 2020, and the accounts are closed on December 31, we need to calculate the insurance expense for the year 2020 based on the number of months the policy was in effect during that year.

STEP 6

Calculate the number of months from April 1, 2020, to December 31, 2020.
Number of months in 2020=9 monthsNumber\, of\, months\, in\, 2020 = 9\, months

STEP 7

Calculate the insurance expense for the year 2020 by dividing the annual insurance expense by 12 and then multiplying by the number of months the policy was in effect in 2020.
Insurance expense for 2020=(Annual insurance expense12)×Number of months in 2020Insurance\, expense\, for\, 2020 = \left(\frac{Annual\, insurance\, expense}{12}\right) \times Number\, of\, months\, in\, 2020

STEP 8

Now, plug in the values to calculate the insurance expense for the year 2020.
Insurance expense for 2020=($8,40012)×9 monthsInsurance\, expense\, for\, 2020 = \left(\frac{\$8,400}{12}\right) \times 9\, months

STEP 9

Calculate the insurance expense for the year 2020.
Insurance expense for 2020=($8,40012)×9=$7,000Insurance\, expense\, for\, 2020 = \left(\frac{\$8,400}{12}\right) \times 9 = \$7,000

STEP 10

Now that we have the insurance expense for the year 2020, we need to adjust the net income reported for the year 2020 by subtracting this expense.
Correct net income for 2020=Reported net income−Insurance expense for 2020Correct\, net\, income\, for\, 2020 = Reported\, net\, income - Insurance\, expense\, for\, 2020

STEP 11

Plug in the values for the reported net income and the insurance expense for the year 2020 to calculate the correct net income.
Correct net income for 2020=$63,000−$7,000Correct\, net\, income\, for\, 2020 = \$63,000 - \$7,000

STEP 12

Calculate the correct net income for the year 2020.
Correct net income for 2020=$63,000−$7,000=$56,700Correct\, net\, income\, for\, 2020 = \$63,000 - \$7,000 = \$56,700
The correct net income for the year 2020 should be 56700.

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