On June 1, Murphy Company paid $5,400 for one year of advertising in advance. Murphy debited Prepaid Advertising. The advertising expense will be used evenly throughout the year. If the appropriate adjusting entry is not made at the end of the year, what will be the effect on:

Expenses = Understated by $3,150

Assets = Overstated by $3,150

Explanation:

When Murphy Company paid for advertising in advance on June 1, the entries will be :

Prepaid Advertising $5,400 (debit)

Cash $5,400 (credit)

By the year end, December 31, 7 months advertising expense would have been expired the entries must be :

Advertising Expense $3,150 (debit)

Prepaid Advertising  $3,150 (credit)

Advertising Expense Calculation = $5,400 × 7/12 = $3,150

Thus, if not adjusted the following are the effects :

Expenses = Understated

Assets = Overstated

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(a) when insurance is obtained through a reciprocal insurer, the insureds are sharing the risk of loss with other subscribers of that reciprocal.

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