Accrual and Prepayment Adjustments Increase Retained Earnings

Steps:

• Start with draft retained earnings of $31,920.
• Add $450 for accrued commission receivable, as this unrecorded income increases profit.
• Add $175 for prepaid insurance, as this reduces overstated expenses and increases profit.
• Calculate total: $31,920 +$450 + $175 =$32,545.

Why B is correct:

• Both adjustments recognize additional income ($450) and correct expense overstatement ($175), boosting net profit and retained earnings per accrual accounting principles.

Why the others are wrong:

• A: Subtracts net adjustment ($275), wrongly treating items as liabilities or extra costs.
• C: Adds only prepaid insurance ($175), omitting the accrued income.
• D: Adds incorrect total ($525), likely from misadding$450 + $175.

Final answer: B