On 12/31/24, the Cheboygan Company paid $4,000 of prepaid insurance and expensed the entire amount. The...

On 12/31/24, the Cheboygan Company paid $4,000 of prepaid insurance and expensed the entire amount. The policy covered the period 1/1/25 to 12/31/29.

The error was discovered on 1/10/28; the 2027 books are closed. The correcting journal entry will include what entry to 1/1/28 Retained Earnings?

Select one:

a. $1,600 debit

b. $2,400 debit

c. $2,400 credit

d. No journal entry needed

e. $1,600 credit

Expert Solution

Insurance expense from 1/1/25 to 12/31/27 = $4,000 * 3 / 5 = $2,400

Amount remaining from prepaid insurance = $4,000 - $2,400 = $1,600

$1,600 is credited to retained earnings.

The answer is Option e.

ekkarill92 answered 2 years ago

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