Homework Answers
Solution:
Prepaid Insurance is the amount of Insurance premium that is paid in advance, before it has become due.
As per the Information given in the question we have
Insurance Premium paid for a period of 36 months = $ 3,900 (Total policy cost)
Thus Total of prepaid Insurance = $ 3,900
( i.e., Insurance Premium paid for the period August, 1 to December 31 )
Thus Insurance premium per month for each of the 36 months = $ 3,900 / 36 = $ 108.3333
When the balance sheet is prepared at December 31, only five months of the Insurance premium paid expires. ( i.e., August , September, October, November, December )
Thus the Insurance premium payment to be recognised as expense as at the balance sheet at year-end December, 31 = $ 108.3333 * 5 = $ 541.6665
= $ 542 ( when rounded off to the nearest whole number )
The amount to be recognised as Insurance expense at December 31 = $ 542
The journal entry for the same would be
Insurance Expense $ 542 Dr
To Prepaid Insurance $ 542
Thus the solution is Option B. Debit Insurance Expense $ 542 Credit Prepaid Insurance $ 542
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