On July 1, East Lake, Inc. purchased a 2-year insurance policy for $12,600. Prepaid Insurance was...

On July 1, East Lake, Inc. purchased a 2-year insurance policy for $12,600. Prepaid Insurance was debited for the entire amount. On December 31, when the annual financial statements are prepared, the appropriate adjusting journal entry to be made would be to

a) debit Prepaid Insurance $2,100; credit Insurance Expense $2,100.

b) debit Insurance Expense $9,450; Credit Prepaid Insurance $9,450.

c) debit Prepaid Insurance $12,600; credit Insurance Expense $12,600.

d) debit Insurance Expense $3,150; credit Prepaid Insurance $3,150.

Expert Solution

6 month insurance plan = 12600/2 * 1/2 = 3150
Prepaid insurance = $12600-$3150 = $9450
Since prepaid insurance was debited, we need to credit Prepaid insurance account for adjusting it and debit the actual expense for the year under Insurance Expense.
So, the entry will be
Insurance expense $3150
Prepaid insurance $3150
Option D

ekkarill92 answered 2 years ago

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