Question

Qwerty, Inc. prepaid $9,600 on September 1, 2015 for a one-year insurance premium. On January 1, 2016 of the next year (after December 31 adjustments), the Prepaid Insurance account will have a debit balance of ________. (Round any intermediate calculations to two decimal places, and your final answer to the nearest whole number.)

A. $7,200
B. $8,000
C. $6,400
D. $8,800
E. None of the above

Answer 1

The debit balance of the Prepaid Insurance account on January 1, 2016, will be $6,400. Hence, option C is correct.

Step-by-step explanation:

The question asks what the debit balance of the Prepaid Insurance account will be on January 1, 2016, after adjusting entries for the year ending December 31. To find the debit balance, we need to consider the prepaid amount and the period that has elapsed since the payment was made.

From September 1, 2015, to January 1, 2016, there are 4 months. Since the insurance premium was paid for a year, 4/12 of the premium has expired or been used up. To calculate the debit balance, we can subtract the expired portion of the premium from the total prepaid amount.

Expired portion = $9,600 x (4/12) = $3,200 Debit balance = Total prepaid amount - Expired portion = $9,600 - $3,200 = $6,400 Therefore, the debit balance of the Prepaid Insurance account on January 1, 2016, will be $6,400.