The Cutter, Inc.uses the accrual basis of accounting.Cutter's insurance expense account had a $25, 000 balance at the end of the year.The prepaid insurance account had a $5, 000 balance at the beginning of the year and a $1, 000 balance at the end of the year.How much cash was paid for insurance during the year?

Question

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The cash paid for insurance is calculated by adjusting the insurance expense by the change in the prepaid insurance account. The insurance expense for the year is $25,000. The prepaid insurance decreased from $5,000 to $1,000, indicating that $4,000 of the prepaid insurance was used, reducing the cash paid. Therefore, cash paid for insurance = Insurance Expense - (Beginning Prepaid Insurance - Ending Prepaid Insurance) = $25,000 - ($5,000 - $1,000) = $25,000 - $4,000 = $21,000.