Question

On October 1 of Year 1 Lesikar Company paid $1,200 cash for an insurance policy that would provide protection for a one year term. Which of the following shows how the required adjustment on December 31, Year 1 will affect Lesikar’s ledger accounts?

Assets			=	Liabilities	+	Stockholders’ Equity
Cash	+	Prepaid Insurance	=	Accounts Payable	+	Common Stock	+	Retained Earnings
(1,200)		1,200

Assets			=	Liabilities	+	Stockholders’ Equity
Cash	+	Prepaid Insurance	=	Accounts Payable	+	Common Stock	+	Retained Earnings
		1,200						(1,200)

Assets			=	Liabilities	+	Stockholders’ Equity
Cash	+	Prepaid Insurance	=	Accounts Payable	+	Common Stock	+	Retained Earnings
		(900)						(900)

Assets			=	Liabilities	+	Stockholders’ Equity
Cash	+	Prepaid Insurance	=	Accounts Payable	+	Common Stock	+	Retained Earnings
		(300)						(300)

Assets			=	Liabilities	+	Stockholders’ Equity
Cash	+	Prepaid Insurance	=	Accounts Payable	+	Common Stock	+	Retained Earnings
		3,600		3,600

Answer 1

31-Dec	Assets			=	Liabilities	+	Owner's equity
	Cash	+	Prepaid insurance	=	Accounts payable	+	Common stock	+	Retained earnings
			($300)	=					($300)
	On October 1:
	Company Paid $1,200 towards insurance expense in advance for one month
	On December 31:
	Therefore expense allocated for 3 months i.e expense to be recorded till 31 st December = ($1,200 X 3/12) = $300 which utilized from prepaid insurance and also the other effect will decrease the owner's equity