On July 31, 2018, a company purchased a two-year insurance policy for $27,000, paying cash and...

On July 31, 2018, a company purchased a two-year insurance policy for $27,000, paying cash and debiting Prepaid Insurance for the entire two-year premium amount. The adjusting entry on December 31, 2018 includes a:

credit to Prepaid Insurance $5,625.

credit to Insurance Expense $5,625.

debit to Prepaid Insurance $6,750.

debit to Insurance expense $6,750.

Expert Solution

Insurance expense for 2 years = $27,000

Insurance expense for 5 months (from July 31 to December 31) = 27,000 x 5/24

= $5,625

The following adjusting entry is needed on December 31, 2018:

Date	General Journal	Debit	Credit
Dec. 31, 2018	Insurance expense	$5,625
	Prepaid insurance		$5,625
	( To record insurance expense)

The adjusting entry on December 31, 2018 includes a credit to prepaid insurance $5,625.

First option is correct.

ekkarill92 answered 2 years ago

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