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

cognitive overload: having a lot on your mind impairs decision-making and tends to result in the simplest, but not necessarily best, option being selected.

empathy gaps: overlooking how you might feel in a different situation can result in unnecessary purchases, such as overbuying when shopping for food on an empty stomach.

optimism and overconfidence: wearing rose-tinted glasses and having unrealistic expectations about the future can affect money management and leave you unprepared for a change in circumstance.

instant gratification: seeking instant gratification drives impulsive spending and can undermine long-term planning and savings.

harmful habits: automatic or mindless behaviour can amplify a poor financial decision as it becomes a recurring event.

social norms: we are heavily influenced by the actions of others; while this can be in certain circumstances, it also contributes to the pressure to keep up with the joneses through conspicuous consumption.

disadvantages of leasing a vehicle: no vehicle equity and mileage limitations

disadvantages of purchasing a vehicle: large down payment and vehicle depreciation

#plato4lyfe