Question

The following information is taken from Camara Company’s unadjusted and adjusted trial balances.

Unadjusted Adjusted Credit Debit Credit

Prepaid insurance \(4,100 \)3,700

Interest payable \(0 \)800

Given this information, which of the following is likely included among its adjusting entries?

a. A \(400 debit to Insurance Expense and an \)800 debit to Interest Payable.

b. A \(400 debit to Insurance Expense and an \)800 debit to Interest Expense.

c. A \(400 credit to Prepaid Insurance and an \)800 debit to Interest Payable.

Short answer

Answer:

Option (b) is correct.

Step-by-step solution

Definition of Interest payable

When the interest payment is due but not paid, this amount is known as interest payable.

Adjusting entries

In the first case, the insurance expense account is debited with $400

In the second case, the interest expense account is debited for $800 because there is an accrued interest.

Hence, option (b) is correct.