Question

On May 1, Landon Supplies Inc. purchased a two year insurance policy for $24,000. The purchase of the insurance policy was recorded as a debit to Prepaid Insurance. The adjusting journal entry at May 31st to record the amount of insurance expired during May will include a

	debit to Prepaid Insurance and a credit to Cash for $1,000.
	debit to Insurance Expense and a credit to prepaid Insurance for $1,000.
	debit to insurance expense and a credit to Cash for $1,000.
	debit to Prepaid Insurance and credit to Insurance Expense for $1,000.

Answer 1

Insurance is paid for 2 years i.e. 24 Months which is $,1000 per month ($ 24,000 / 24 Months).

The entry to record insurance expired during May (for one month) would be debit to Insurance expense and credit to Prepaid insurance.

Insurance expense.. $ 1,000

Prepaid insurance................$ 1,0000

Hence, option second is correct.

Option one and fourth are wrong as there can not be a debit to prepaid insurance. To record insurance expired debit should be to insurance expense.

Option third is also wrong as the credit can not be to cash as the insurance policy has already been paid. The credit has to be Prepaid insurance as it was debited at the time payment of insurance policy.