Answer:
The correcting journal entry will include: A credit entry to 1/1/26 Retained Earnings.
Explanation:
On Payment the entry must have been :
Prepaid Insurance $2,000 (debit)
Cash $2,000 (credit)
By the end of year 2025, one year insurance will have expired and entries will be as follows :
Insurance Expense $,1000 (debit)
Prepaid Insurance $1,000 (credit)
But Instead the entry in error was made as :
Insurance Expense $,1000 (debit)
Cash $2,000 (credit)
This results in the Retained Earnings being Understated by $1,000 .
<em>The amount of overstatement is corrected as :</em>
Prepaid Insurance $,1000 (debit)
Retained Earnings $,1000 (credit)
