On August 1,Year 1,Lace Company paid $2,400 cash for an insurance policy that would provide protection for a one-year term.Which of the following shows how the required adjustment on December 31,Year 1,will affect Lace Company's ledger accounts?

Question

Quizplus · Accepted Answer

Cost per month = $2,400 total ÷ 12 months = $200 per month
As of December 31, Year 1:
Amount used = $200 per month × 5 months = $1,000 insurance expense
The expense recognition causes the asset (Prepaid Insurance) to decreases. Further the expense recognition causes net income to decrease which ultimately causes retained earnings to decrease.

On August 1,Year 1,Lace Company Paid $2,400 Cash for an Insurance