Omission of prepaid insurance accrual

Steps:

• Identify the error: Cash payment of $240 for 12-month insurance was not recorded, affecting assets and expenses.
• Determine coverage period: Insurance covers 2021, so none relates to 2020 financial statements.
• Assess 2020 impact: No insurance expense or prepaid asset needed for 2020, as payment is post-year-end for future coverage.
• Conclude correction: No adjustment to 2020 statements; record as prepaid in 2021.

Why B is correct:

• B states no effect on 2020 statements, per accrual accounting principle that expenses match the period benefited (none in 2020).

Why the others are wrong:

• A: Incorrectly increases 2020 expenses, ignoring future coverage.
• C: Wrongly records full amount as 2020 prepaid asset, as payment is for 2021.
• D: Falsely decreases 2020 net income, misapplying the matching principle.

Not enough information on exact coverage end date and choices A/C/D details.

Final answer: B