Accounting homework help?

Here's an example of a deferral. Let's assume I have a December 31 fiscal year-end. On September 1, I pay a full year's insurance premium in the amount of $600.

This pays the insurance from September 1 of this year until August 31 of next year. So the insurance costs me $50 per month. When I pay the bill, I charge the $600 to Insurance Expense.

So on December 31, I have "used up" 4 months' worth of my insurance ($50 x 4 months = $200) and there is 8 months' worth ($50 x 8 months = $400) left to be "used up" next year. That means I need to make a journal entry to "defer" $400 of the insurance expense until next year. The entry I should make is to debit (increase) Prepaid Insurance (an asset) for $400 and to credit (decrease) Insurance Expense (an expense) for $400.

If I omit this adjusting entry, my expenses are $400 too high (overstated) and my ending assets are $400 too low (understated). Therefore the correct answer is d.

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