Practice prompt · Q:transactions-to-statements/deferral-adjustments-001

Adjust a prepayment and customer advance

Formative numerical check on cash date deferral entries, month end adjustments, and remaining balances.

Updated Sep 6, 2026 Review due Nov 6, 2026

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A company opens with $15,000 Cash and equity. It pays $6,000 for six months of even insurance coverage and receives $8,000 for four equal service milestones. Assume no other opening balances or events. Each accepted milestone earns an equal share of the price. At month-end, one month of coverage and one milestone are complete and accepted. Customer Advance is the unearned-revenue liability. Which adjusted balances are correct?

Choose the best answer. A Ending Cash $17,000 debit; Prepaid Insurance $5,000 debit; Insurance Expense $1,000 debit; Customer Advance $6,000 credit; Service Revenue $2,000 credit; trial-balance totals $23,000. B Ending Cash $17,000 debit; Insurance Expense $6,000 debit; Customer Advance $0; Service Revenue $8,000 credit; trial-balance totals $23,000. C Ending Cash $17,000 debit; Prepaid Insurance $6,000 debit; Insurance Expense $0; Customer Advance $8,000 credit; Service Revenue $0; trial-balance totals $23,000. D Ending Cash $17,000 debit; Prepaid Insurance $7,000 debit; Insurance Expense $1,000 credit; Customer Advance $10,000 credit; Service Revenue $2,000 debit.

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Answer: A

The $6,000 payment debits Prepaid Insurance and credits Cash; one of six months transfers $1,000 to Insurance Expense, leaving $5,000 prepaid. The $8,000 receipt debits Cash and credits Customer Advance; one of four milestones transfers $2,000 to Service Revenue, leaving a $6,000 liability. Cash is $15,000 minus $6,000 plus $8,000, or $17,000. Adjusted debit balances are $17,000 Cash, $5,000 Prepaid Insurance, and $1,000 Insurance Expense; credits are $15,000 Owners' Equity, $6,000 Customer Advance, and $2,000 Service Revenue. Each side totals $23,000.