Final answer:
The Prepaid insurance account has a debit balance of $2,000.
Step-by-step explanation:
The Prepaid insurance account has a debit balance of $2,000.
Since the business pays its insurance premium of $2,400 on November 1 of each year, the entire amount is initially recorded as a prepaid expense. However, by January 1 of the new year, after December 31 adjustments, a portion of the prepaid insurance has expired.
Assuming the business recognizes insurance expense monthly, two months have passed from November 1 to January 1. Therefore, we can calculate the portion of the premium that has expired as follows:
Expired Insurance = (Insurance Premium / Total Coverage Period) * Number of Months Passed
Expired Insurance = ($2,400 / 12 months) * 2 months = $400
As a result, the Prepaid insurance account has a debit balance of $400 less than the original premium, which is $2,400 - $400 = $2,000.