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

2. Transaction Analysis

Journal Entries: Debits and Credits

Financial Accounting

2. Transaction Analysis

Journal Entries: Debits and Credits

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Multiple Choice

On July 1, 2022, Ling Co. pays $12,400 in advance for a one-year insurance policy. Which of the following is the correct journal entry to record this transaction?

Debit Cash $12,400; Credit Prepaid Insurance $12,400

Debit Prepaid Insurance $12,400; Credit Cash $12,400

Debit Insurance Expense $12,400; Credit Cash $12,400

Debit Insurance Payable $12,400; Credit Cash $12,400

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Verified step by step guidance

Step 1: Understand the nature of the transaction. Ling Co. is paying $12,400 in advance for a one-year insurance policy. This means the payment is for a future benefit, not an immediate expense, and should be recorded as an asset (Prepaid Insurance).

Step 2: Identify the accounts involved. The two accounts affected are 'Prepaid Insurance' (an asset account) and 'Cash' (an asset account). Since cash is being paid, it will decrease, and prepaid insurance will increase.

Step 3: Determine the correct journal entry. When an asset increases, it is debited, and when an asset decreases, it is credited. Therefore, 'Prepaid Insurance' will be debited for $12,400, and 'Cash' will be credited for $12,400.

Step 4: Write the journal entry. The journal entry will be: Debit Prepaid Insurance $12,400; Credit Cash $12,400. This reflects the payment of cash and the recognition of the prepaid insurance asset.

Step 5: Review the other options provided in the problem. The correct answer is Debit Prepaid Insurance $12,400; Credit Cash $12,400. The other options are incorrect because they either misclassify the transaction as an expense or payable, or reverse the debit and credit entries.