Question

Hoffman, Inc. adjusts its books each month but closes its books at the end of the year. The trial balance at March 31 before adjustments is as follows:
Debit Credit
Cash $11,120
Accounts Receivable 9,820
Supplies 1,500
Prepaid Insurance 2,720
Equipment 21,000
Accumulated Depreciation: Equipment $8,400
Unearned Service Revenue 7,500
Capital Stock 6,200
Retained Earnings 24,400
Dividends 1,760
Service Revenue Earned 13,110
Salaries Expense 8,800
Utilities Expense 590
Rent Expense 2,300
$59,610 $59,610
On March 1, Hoffman paid in advance for four months' insurance. The necessary adjusting entry at March 31 includes which of the following?

a. A debit to Prepaid Insurance for $2,040.
b. A debit to Prepaid Insurance for $680.
c. A credit to Prepaid Insurance for $2,040.
d. A credit to Prepaid Insurance for $680.

Answer 1

Answer:

d. A credit to Prepaid Insurance for $680.

Explanation:

The computation of the prepaid insurance is shown below:

Given that

Four month prepaid insurance = $2,720

For one month, the prepaid insurance is

= $2,720 ÷ 4 months

= $680

Since we have to record the prepaid expenses for 1 month, we divided the total prepaid insurance by the 4 months due to that it decreases by $680 and that's why we credited this account