On January 1, a company purchased a five-year insurance policy for $3,500 with coverage starting immediately....

On January 1, a company purchased a five-year insurance policy for $3,500 with coverage starting immediately. If the purchase was recorded in the Prepaid Insurance account, and the company records adjustments only at year-end, the adjusting entry at the end of the first year is:

Multiple Choice

Debit Prepaid Insurance, $2,800; credit Insurance Expense, $2,800.
Debit Prepaid Insurance, $700; credit Insurance Expense, $700.
Debit Insurance Expense, $700; credit Prepaid Insurance, $2,800.
Debit Prepaid Insurance, $3,500; credit Cash, $3,500.
Debit Insurance Expense, $700; credit Prepaid Insurance, $700.

Expert Solution

Answer is Debit Insurance Expense,$700 ; Credit Prepaid Insurance,$700

Company purchased a five year insurance policy for $ 3500 on January 1.

One year insurance expense = $3500/5 = $ 700

Prepaid insurance balance at the end of first year = $2800 ($3500-$700)

The purchase was recorded in the prepaid insurance account, and the company records adjustments at year-end. So adjusting entry is:-

Debit Insurance expense, $700 ; credit prepaid insurance, $700.

ekkarill92 answered 2 years ago

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