The Fireworks Hut paid $18,200 for a one-year insurance policy on January 1 and recorded the...

The Fireworks Hut paid $18,200 for a one-year insurance policy on January 1 and recorded the entire amount as prepaid insurance. Before preparing its March 31 financial statements the company should make which of the following adjusting entries?

Select one:

a. debit Prepaid Insurance, $13,650; credit Insurance Expense, $13,650.

b. debit Cash, $9,100; credit Prepaid Insurance, $9,100.

c. debit Cash, $18,200; credit Insurance Expense, $18,200.

d. debit Insurance Expense, $4,550 credit Prepaid Insurance $4,550.

Expert Solution

Correct choice: d. debit Insurance Expense, $4,550 credit Prepaid Insurance $4,550.

On January 1, $18,200 is paid in advance for a one-year insurance policy. A prepaid expense is recorded at that time.
- Prepaid insurance is an asset (current asset). Therefore, an increase in prepaid insurance is debited.
- Cash, also being an asset, its decrease is credited.
As of March 31, three months (Jan, Feb & Mar) have elapsed. Therefore, 3 months' insurance expense has to be recognized.
- Insurance expense for three months = $18,200 x 3/12 = $4,550
- Insurance expense (increase) is debited.
- Decrease in prepaid insurance (an asset) is credited.

ekkarill92 answered 2 years ago

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