Question

Prepaid Insurance. The Prepaid Insurance account has a $5,890 debit balance at the start the year. A review of insurance policies and payments shows $1,040 of insurance has expired 0s year-end.

Answer 1

The Prepaid Insurance account's new balance is $4,850 after accounting for $1,040 of insurance that has expired by year-end. An adjusting journal entry debits Insurance Expense and credits Prepaid Insurance to reflect the used portion of the prepaid insurance.

Step-by-step explanation:

The question pertains to adjusting a Prepaid Insurance account at the end of the year to reflect the expired portion of insurance coverage. When the year began, the account had a $5,890 debit balance, indicating the amount paid in advance for insurance.

At year-end, it is determined that $1,040 of this amount has expired. To adjust the accounts accurately, an adjusting entry must be made that debits Insurance Expense for $1,040 and credits Prepaid Insurance for the same amount. This adjusts the balance of the Prepaid Insurance account to reflect the unexpired cost that will be recognized in the future.

The final adjusted balance in the Prepaid Insurance account would be the original balance minus the expired portion, which now equals $4,850 (i.e., $5,890 - $1,040).