Question

A company takes out a two year fire insurance policy costing $12018 on May 1, 20x4. The cost of the policy was debited to the Insurance Expense account 20x4, the adjusting entry will include which of the following: or follows Select one: a. A credit to prepaid insurance of $8012 b. A credit to insurance expense of $8012 © C. A debit to insurance expense of $400 d. A credit to insurance expense of Check

Answer 1

Answer

• Correct Answer = Option ‘B’ A Credit to Insurance expense of $ 8012.
• This is because Insurance expense was earlier Debited by $ 12018, for 24 months.
  No. of months since 1 May to 31 Dec = 8 months. Hence it should have been debited by 8 month expense.
  For remaining 16 months expense, The Insurance expense will be credited.
  Insurance expense to be credited by $ 12018 x 16/24 = $ 8012.