Question

A company shows a $600 balance in Prepaid Insurance in the Unadjusted Trial Balance columns of the work sheet. The Adjustments columns show expired insurance of $200. This adjusting entry results in: Select one: a. $200 decrease in net income. b. $200 increase in net income. c. $200 difference between the debit and credit columns of the Unadjusted Trial Balance. d. $200 of prepaid insurance. e. An error in the financial statements.

Answer 1

Answer:

a. $200 decrease in net income.

Explanation:

When insurance is paid in advance, the entries required are;

Debit Prepaid Insurance

Credit Cash account

As time elapses and the insurance expires,

Debit Insurance expense

Credit Prepaid Insurance

Given that the Adjustments columns show expired insurance of $200, this will be recorded as an expense and will thus decrease the net income.