Question

On June 15th, paid $1,800 for six months of insurance coverage. The insurance coverage will begin on July 1st Account Name Debit Credit A. Prepaid Insurance 900 Cash 900 B. Insurance Expense 900 Cash 900 C. Insurance Expense 1,800 Cash 1,800 D. Prepaid Insurance 1,800 1,800 Cash

Answer 1

Question 47:

When an expense is paid in advance, the prepaid expense a/c should be debited as it is an asset and cash a/c should be credited as the cash balance gets decreased on payment of expense.

Prepaid Insurance = $1,800

Journal Entry:

Prepaid Insurance Dr $1,800

Cash a/c $1,800

Correct Option is Answer D

Question 48:

If adjustment entry needs to be passed with regard to prepaid expenses, then the expired period should be observed and the expense for the related period should be recognised deducting the prepaid expense a/c.

Expired Period = July 1 to September 30 = 3 months

Total period for which expense paid = 6 months

Expense to be recognised = $1,800 * 3/6 = $900

Journal Entry:

Insurance Expense a/c Dr $900

To Prepaid Expense a/c $900

Correct Option is Answer B