Question

In: Accounting

An accrual basis company pays $24,000 for 1 year's insurance premiums and debits Insurance Expense. If,...

An accrual basis company pays $24,000 for 1 year's insurance premiums and debits Insurance Expense. If, 3 months later, your firm's year ends, what adjusting entry do you record?

A. Insurance Expense $18000

Prepaid Insurance $18,000

B. Prepaid Insurance $18,000

Insurance Expense $18,000

C. Insurance Expense $6,000

   Prepaid Insurance $6,000

D. Prepaid Insurance $6,000

Insurance Expense $6,000

Solutions

Expert Solution

Answer: Option (B) is correct

Explanation:

Insurance expense not expired = Total premium paid * (Number of months not expired / Total number of months for which premium is paid)

= $24,000 * (9 months / 12 months)

= $18,000

At the time of payment of insurance premium we pass the following entry -

Insurance expense Dr. $24,000

To Bank / Cash Cr. $24,000

(Being insurance expense paid)

Since at the end of the financial year only 3 months expired, the remaining 9 months will be treated as prepaid expense.

Prepaid Expense Dr. $18,000

Insurance expense Cr. 18,000

(Being insurance expense not expired)

ekkarill92 answered 2 years ago
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