Exercise 3-5B Effect of an error on financial statements On June 1, Year 1, Ark Corporation paid $8,400 to purchase a 24-month insurance policy. Assume that Ark records the purchase as an asset and that the books are closed on December 31. Required a. Show the purchase of the insurance policy and the related end-of-period adjustment to recognize insurance expense in the accounting equation. b. Assume that Ark Corporation failed to record the end-of-period adjustment to reflect the expiration of insurance. How would the error affect the company's Year 1 income statement and balance sheet? EXERCISE 3-5B a. Ark Corporation Accounting Equation Year 1 Assets Stockholders' Equity Prepaid Com. Retained Event Cash Insurance Stock + Earnings Pur. Insurance Adj. Ins Exp. Totals b. The required entry would (increase/decrease) (assets/liabs.) by $ and decrease by $ If this entry is not made, and would both be overstated on the balance sheet by $. On the income statement, expenses would be (over/understated) causing to be overstated by $2,450