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23 October, 12:19

The company pre-paid $40,000 for a four-year insurance policy on January 1, 2014. At the end of 2017, before the books were closed, it was discovered this full amount had been incorrectly expensed on January 1, 2014. What would be the adjustment to retained earnings on December 31, 2017 to remedy this mistake?

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  1. 23 October, 13:38
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    No adjustment is to be made on December 31, 2017.

    Explanation:

    The Insurance expense was prepaid on January 1, 2014 for four years, which means this four year insurance should have ended on December 31, 2017.

    The Insurance was fully expensed out on January 1, 2014 which is discovered on December 31, 2017 when the Insurance is utilised and in usual circumstances should have been completely expensed out till December 31, 2017. No adjustment is to be made on December 31, 2017.
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