Multiple Choice
Which of the following best describes how a business should account for prepaid insurance at the end of an accounting period?
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3. Accrual Accounting Concepts
Introduction to Adjusting Journal Entries and Prepaid Expenses
Multiple Choice
Which of the following would you NOT consider when preparing adjusting journal entries for prepaid expenses at the end of an accounting period?
A
The remaining balance of the prepaid expense after adjustment
B
The estimated future cash flows from a potential investment project
C
The portion of the prepaid expense that has been used up during the period
D
The original amount paid for the prepaid expense
Verified step by step guidance1
Understand the concept of prepaid expenses: Prepaid expenses are payments made in advance for goods or services to be received in the future. At the end of an accounting period, adjustments are made to reflect the portion of the prepaid expense that has been used up during the period.
Identify the key elements to consider when adjusting prepaid expenses: These include the original amount paid for the prepaid expense, the portion of the prepaid expense that has been used up during the period, and the remaining balance of the prepaid expense after adjustment.
Recognize irrelevant information: The estimated future cash flows from a potential investment project are unrelated to the adjustment of prepaid expenses. This information does not impact the journal entry for prepaid expenses.
Determine the adjusting journal entry: To adjust prepaid expenses, debit the expense account to reflect the portion used during the period and credit the prepaid expense account to reduce its balance.
Ensure accuracy in the adjustment: Verify that the adjusted balance of the prepaid expense account matches the remaining balance after the portion used has been accounted for.
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