The Prepaid Insurance account has a normal balance of $5,625 at the beginning of the month....

The Prepaid Insurance account has a normal balance of $5,625 at the beginning of the month. The company used $1,470 of insurance coverage during the month. Which of the following statements is correct?

The company should credit Insurance Expense for $1,470 and debit Prepaid Insurance for $1,470.
Retained earnings will decrease and stockholders' equity will increase.
The company should debit Insurance Expense for $1,470 and credit Prepaid Insurance for $1,470.
Retained earnings and stockholders' equity will both increase.

Solutions

Expert Solution

Answer: The company should debit Insurance Expense for $1,470 and credit Prepaid Insurance for $1,470

Explanation:

Balance in Prepaid Insurance account represents the amount of insurance paid which is not yet incurred by the company at a particular date. The same will be recognised as expense only when it is incurred.

When a part of insurance coverage is used during a particular period, appropriate amount of expense has to be recognised by trasferring the the appropriate amount from prepaid insurance account to insurance expense account.

In the given situation, it is given that company used $1,470 of insurance coverage during the month

Therefore, out of the beginning balance of $5,625 of prepaid insurance, $1,470 should be transferred to insurance expense account. by debiting Insurance expense account and crediting Prepaid Insurance account.

The Journal entry to record the adjustment will be:

Insurance Expense 1,470

Prepaid Insurance 1,470

ekkarill92 answered 1 year ago

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