q31 This is an adjustment for a deferral an accrual becasaus

q3.1)

This is an adjustment for (a deferral/ an accrual) becasause cas was exchanged (after/ before) the expense was incurred.

Sally Company was started on January 1, 2009. During its first week of business, the company paid $4,800 for 30 months\' worth of fire insurance with an effective date of January 1, 2009. When Sally Company prepares its financial statements for the year ended December 31, 2009, how much prepaid insurance will be shown on the balance sheet, and how much insurance expense will be shown on the income statement? Is the needed adjustment at year end related to an accrual or a deferral? How much prepaid insurance will be shown on the balance sheet? Select the formula you will use to calculate the prepaid insurance balance at December 31, 2009. Then enter the amounts and calculate the balance. (Round your answer to the nearest whole number.) Prepaid insurance How much insurance expense will be shown on the income statement? Select the formula you will use to calculate the insurance expense for the year ended December 31, 2009. Thern enter the amounts and calculate the expense. (Round your answer to the nearest whole number.) Insurance expense Is the needed adjustment at year end related to an accrual or a deferral?

Solution

Prepaid Insurance balance at Dec.31,2009 Formula used will be: Total cash paid/ Total period for which paid* No.of periods outside the current fiscal = Prepaid Insurance 4800/ 30* 18 = 2880 Insurance expense that will be shown on the Income Statement(Jan 1--Dec.31,2009) Formula used will be: Total cash paid/ Total period for which paid* No.of periods falling in the current fiscal = Insurance Expense 4800/ 30* 12 = 1920 The above adjustment is a DEFERRAL of expensing the prepayment amount paid--till which time,it is carried as a current asset in the balance sheet.