Question

On January 1 a company purchased a five-year insurance policy for $2,300 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:

A.)Debit Insurance Expense, $460; credit Prepaid Insurance, $1,840.

B.)Debit Prepaid Insurance, $460; credit Insurance Expense, $460.

C.)Debit Prepaid Insurance, $1,840; credit Insurance Expense, $1,840.

D.)Debit Insurance Expense, $460; credit Prepaid Insurance, $460.

E.)Debit Prepaid Insurance, $2,300; credit Cash, $2,300.

Answer 1

Income statement includes the expenses related to current year only. Amount is paid for the insurance policy for 5 years.

Amount of insurance expense that would appear on the company's income statement for the first year ended December 31 = 2,300 x 1/5 = $460.

Whole amount was debited to Prepaid insurance account, now we need to transfer $460, as computed above, to the insurance expense account. For this, purpose we need to Debit Insurance Expense Account and Credit Prepaid Insurance Account by $460. The entry would be:

Date	Particulars	Debit	Credit
December 31	Insurance Expense Account	$460
	Prepaid Insurance Account		$460

Thus, the correct option is Option D.