Each year, White Mountain Enterprises (WME) prepares a reconciliation schedule that compares its income statement with its statement of cash flows on both the direct and indirect method bases. In its 2018 income statement, WME reported $58,000 for insurance expense. WME paid $72,000 in insurance premiums during 2018. In its reconciliation schedule, WME should:
A) Show a $14,000 positive adjustment to net income under the indirect method for the increase in prepaid insurance.
B) Show a $14,000 negative adjustment to net income under the indirect method for the decrease in prepaid insurance.
C) Show a $14,000 negative adjustment to net income under the indirect method for the increase in prepaid insurance.
D) Show a $14,000 positive adjustment to net income under the indirect method for the decrease in prepaid insurance.

Question

Quizplus · Accepted Answer

Prepaid insurance, an asset account, increased by the cash payment of $72,000 and decreased by the $58,000 portion that was expensed. Thus, prepaid insurance increased by $14,000.

Each Year, White Mountain Enterprises (WME) Prepares a Reconciliation Schedule