On May 1, 2005, a Company Purchased Prepaid Insurance, Covering

Multiple Choice

On May 1, 2005, a company purchased prepaid insurance, covering the next three years, for $10,800. The entire amount was debited to insurance expense at that time. On January 10, 2007, the error was discovered. The average income tax rate was 40 percent. The correction of prior years' error (including its tax effect) on January 10, 2007, is:

A) debit of $2,880.
B) credit of $2,880.
C) debit of $3,240.
D) credit of $3,240.