Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

3. Accrual Accounting Concepts

Introduction to Adjusting Journal Entries and Prepaid Expenses

Financial Accounting

3. Accrual Accounting Concepts

Introduction to Adjusting Journal Entries and Prepaid Expenses

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Multiple Choice

Assume that Denis Savard Inc. paid $2,400 for a one-year insurance policy on December 1 and recorded the entire amount as Prepaid Insurance. What adjusting journal entry should be made on December 31 to properly account for the insurance expense for the month of December?

Debit Insurance Expense $200; Credit Prepaid Insurance $200

Debit Insurance Expense $2,400; Credit Prepaid Insurance $2,400

Debit Prepaid Insurance $200; Credit Insurance Expense $200

Debit Prepaid Insurance $2,400; Credit Cash $2,400

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Verified step by step guidance

Step 1: Understand the concept of prepaid expenses. Prepaid expenses are payments made in advance for goods or services to be received in the future. In this case, the insurance policy is paid for one year in advance, and the cost is initially recorded as an asset (Prepaid Insurance).

Step 2: Determine the portion of the prepaid insurance that has been used up by December 31. Since the policy covers one year and was purchased on December 1, only one month of insurance has been consumed by the end of December. Divide the total cost of the policy ($2,400) by 12 months to calculate the monthly expense:

\frac{2400}{12}

Step 3: Recognize that the consumed portion of the prepaid insurance must be recorded as an expense. This is done by debiting the Insurance Expense account for the amount used ($200 for December).

Step 4: Adjust the Prepaid Insurance account to reflect the reduction in the asset. Credit the Prepaid Insurance account for the same amount ($200) to decrease its balance, as this portion has now been used.

Step 5: Prepare the adjusting journal entry. The entry will be: Debit Insurance Expense $200; Credit Prepaid Insurance $200. This ensures that the financial statements accurately reflect the expense incurred during December and the remaining prepaid asset.