Reference no: EM132813445

Question - An insurance company has an October 31 fiscal year-end, and its preparing its financial statement for the annual period ended on October 31, 2018. No adjusting entries have been made until October 31, 2018 for the following events. Note that adjusting entries also include journal entries for correcting any errors made by the firm's accountant.

(1) On August 1, 2018, the insurance company borrowed $4,000 from its CEO (Chief Executive Officer) at an annual interest rate of 12%. Journal entry for this event on August 1, 2018 was not recorded on August 1, 2018 because of an error made by the firm's accountant. Both the principal repayment and the interest payment will occur on August 1, 2019.

(2) On December 1, 2017, the insurance company loaned $7,000 to its CFO (Chief Financial Officer) at an annual interest rate of 12% Journal entry for this event on December 1, 2017 was already recorded on December 1, 2017. Both the principal repayment and the interest payment will occur on December 1, 2019.

(3) On June 1, 2018, the company received $36.000 cash from a customer prior to performing the insurance coverage services that are expected to occur over the subsequent two-year period. Journal entry for this event on June 1, 2018 was not recorded on June 1, 2018 because of an error made by the firm's accountant.

(4) On March 1, 2018, the insurance company paid $18.000 cash for its office rental contract, which is immediately effective for the three-year period beginning on March 1, 2018. Journal entry for this event on March 1, 2018 was not recorded on March 1, 2018 because of an error made by the firm's accountant.

(5) On February 1, 2018, the insurance company paid $77,000 to purchase Equipment that is useful for the next seven years since the purchase date. Journal entry for this event on February 1, 2018 was not recorded on February 1, 2018 because of an error made by the firm's accountant. Zero value is expected to be left at the end of the useful life. The insurance company uses the straight-line depreciation method of the equal allocation of the costs over time.

(6) On October 30, 2018, the insurance company declared $10,000 cash dividends in total. The actual cash payments to shareholders were scheduled to take place on December 30, 2018. Journal entry for this event on October 30, 2018 was not recorded on October 30, 2018 because of an error made by the firm's accountant.

(7) On October 16, 2018, the insurance company paid $35,500 salaries to its employees for the work performed for the past 30 days, including October 16, 2018. On October 16, the firm's accountant made an erroneous journal entry of debiting $55,500 cash and crediting $55,500 salaries expenses. Salaries are paid on a monthly basis so the next payday is November 15, 2018. All employees stayed with the company for the entire fiscal year of 2018.

(8) On October 31, 2018, the insurance company received $2,000 cash from its customers for its expected delivery of insurance services in the fiscal year of 2019. On this date, the firm's accountant made an erroneous journal entry of debiting $20.000 prepaid expenses and crediting $20,000 revenues.

a) In the absence of the adjusting entries, is there an overstatement or understatement in the asset section on the firm's statement of financial position for the fiscal year ended on October 31, 2018? What is the exact dollar amount of the over or understatement?

b) In the absence of the adjusting entries, is there an overstatement or understatement in the liability section on the firm's statement of financial position for the fiscal year ended on October 31, 2018? What is the exact dollar amount of the over or understatement?

c) In the absence of the adjusting entries, is there an overstatement or understatement in the shareholder's equity section on the firm's statement of financial position for the fiscal year ended on October 31, 2018? What is the exact dollar amount of the over or understatement?