Aaron Lynch Company has the following balances in selected accounts on December 31, 2019.

Service Revenue$40,000
Insurance Expense2,700
Supplies Expense2,450

All the accounts have normal balances. Aaron Lynch Company debits prepayments to expense accounts when paid, and credits unearned revenues to revenue accounts when received. The following information below has been gathered at December 31, 2019.
1. Aaron Lynch Company paid $2,700 for 12 months of insurance coverage on June 1, 2019.
2. On December 1, 2019, Aaron Lynch Company collected $40,000 for consulting services to be performed from December 1, 2019, through March 31, 2020.
3. A count of supplies on December 31, 2019, indicates that supplies of $900 are on hand.

Required:
Prepare the adjusting entries needed at December 31, 2019.

1. Debit Insurance expense $1,575

Credit prepayment $1,575.

2. Debit Unearned income $10,000

Credit Service revenue  $10,000

3. no entries are required as the balance would be recognized in the balance sheet as inventory balance

Explanation:

When an amount is paid in advance for insurance yet to be enjoyed, the entries required are debit prepayment and credit cash account. On incurring the expense, the entries to be posted are debit insurance expense, credit prepayment.

For amounts received in advance for service yet to be rendered, debit cash account and credit unearned revenue. When revenue is earned, debit unearned revenue and credit service revenue.

For supplies that are purchased, debit supplies account and credit cash or accounts payable. When supplies are used up, the amount used up is recorded as debit supplies expense and credit supplies account.

As such where Aaron Lynch Company paid $2,700 for 12 months of insurance coverage on June 1, 2019, as at purchase time, debit prepayment $2,700 and credit cash account $2,700.

As at 31 December, expense to be recorded amounts to

= 7/12 * $2,700 (1 June to 31 December is 7 months)

= $1,575

To record this,

Debit Insurance expense $1,575

Credit prepayment $1,575.

where On December 1, 2019, Aaron Lynch Company collected $40,000 for consulting services to be performed from December 1, 2019, through March 31, 2020, amount earned as revenue as at  December 31 would be

= 1/4 * $40,000

= $10,000

Entries required are

Debit Unearned income $10,000

Credit Service revenue  $10,000

Finally, where a count of supplies on December 31, 2019, indicates that supplies of $900 are on hand, no entries are required as the balance would be recognized in the balance sheet as inventory balance.

b is the correct answer