The insurance company has an October 31 fiscal year-end, and it is preparing its financial statements 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.

(i) 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 already recorded on August 1, 2018. Both the principal repayment and the interest payment will occur on August 1, 2019.

(ii) 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.

(iii) 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 already recorded on June 1, 2018.

(iv) 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 already recorded on March 1, 2018.

(v) 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 already recorded on February 1, 2018. Zero value is expected to be left at the end of the useful life. The insurance company uses the straight-line depreciation method of equal allocation of the costs over time.

(vi) On October 28, 2018, the insurance company declared $ 10,000 worth of common stock dividends in total. The actual stock issuance to common shareholders was scheduled to take place on December 30, 2018. Journal entry for this event on October 28, 2018, was not recorded on October 28, 2018, because of an error made by the firm’s accountant.

(vii) On October 29, 2018, the insurance company received $35,500 in cash when it issued callable preferred shares. Journal entry for this event on October 29, 2018, was not recorded on October 29, 2018, because of an error made by the firm’s accountant.

(viii) On October 30, 2018, the insurance company repurchased $2,000 worth-common of stocks which were originally issued for $1,500 in total during the year 2011. 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.

In the absence of the adjusting entries, estimate the aggregate impact on the insurance firm’s financial statements for the fiscal year that ended on October 31, 2018.

(a) In the absence of the adjusting entries, is there an overstatement or understatement in the shareholders’ equity section on the firm’s statement of financial position for the fiscal year ended on October 31, 2018? State either Overstatement or Understatement in the box below.

Answer rating: 100% (QA)

i To record the borrowing of 4000 at 12 annual interest rate Date Entries Cash 2019 Aug 1 Date Entri... View the full answer