Question

Early in 2018, Benton Well Supplies discovered that a five-year insurance premium payment of $50,000 at the beginning of 2015 was debited to insurance expense. The correcting entry would include: Multiple Choice A debit to prepaid insurance of $50,000.

Answer 1

Answer:

a. A credit to retained earnings of $20,000.

Explanation:

The insurance premium payment was initially started in 2015. In 2018, the correct entry would include a $20,000 credit to retained earnings and debit prepaid insurance of $20,000. Since there are still 2 years remaining on the insurance policy, so a payment of $10,000 for the 1 year and $10,000 for the second year, which makes it $20,000 for two years.