Question

A business had an inexperienced bookkeeper. During the first two weeks on the job, the bookkeeper made a mistake while recording a journal entry. The business paid $2,100 for next year’s insurance. The bookkeeper debited insurance expense for $1,200 and credited $1,200 to Cash. What is the correcting entry?

Select one:

a. Debit prepaid insurance, $2,100; Credit insurance expense, $1,200; and Credit Cash, $900

b. Debit insurance expense, $2,100; Credit prepaid insurance, $1,200; Credit Cash, $900

c. Debit insurance expense, $1,200; Debit prepaid insurance, $900; Credit Cash, $2,100

d. Debit prepaid insurance, $1,200; Debit insurance expense, $900; Credit Cash, $2,100

Answer 1

In this case Correct Entry Would be:-

Prepaid Insurance A/c Dr.	$2,100
	To Cash A/c Cr.	$2,100

Narration: Pre paid insurance paid for the Upcoming year.

Incorect Entry made by Bookkeeper:-

Insurance Expenses A/c Dr. $1,200

To Cash A/c Cr. $1,200

Narration: Incorrect entry made

Now for correcting the entry , we are required to debit Prepaid insurance by correct amount which is $2,100 and we have to credit cash account by $900 more and we have to reversed the Insurance expenses account by $1,200.

So the Correct entry will be:

Prepaid Insurance A/c Dr. $2,100

To Insurance Expenses A/c Cr. $1,200

To Cash A/c Cr. $900

Narration: Rectification of entry made.

So, the corect answer would be (a.) Debit prepaid insurance, $2,100; Credit insurance expense, $1,200; and Credit Cash, $900.

I am also attaching hand written solution for your easy reference.m