Multiple Choice
Which of the following is the correct adjusting journal entry at the end of the period for prepaid insurance that has been partially used?
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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 making an adjusting journal entry for prepaid expenses?
A
The original amount paid for the prepaid expense
B
The portion of the prepaid expense that has been used up during the period
C
The amount of prepaid expense remaining at the end of the period
D
The expected future cash flows from a potential investment project
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. These are recorded as assets initially and gradually expensed as they are used up over time.
Identify the purpose of adjusting journal entries for prepaid expenses: Adjusting entries are made to allocate the portion of the prepaid expense that has been used during the accounting period, ensuring accurate financial reporting.
Review the components relevant to adjusting prepaid expenses: These include the original amount paid, the portion used during the period, and the remaining balance at the end of the period. These factors help determine the expense to be recognized and the updated asset balance.
Exclude irrelevant information: The expected future cash flows from a potential investment project are unrelated to the adjustment of prepaid expenses. Adjusting entries focus solely on the allocation of prepaid amounts based on usage and remaining balances.
Prepare the adjusting journal entry: Debit the appropriate expense account to recognize the portion used during the period and credit the prepaid expense account to reduce the asset balance accordingly.
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