Question

Yummy Foods purchased a two-year fire and extended coverage insurance policy on August 1, 2021, and charged the $3,000 premium to Insurance expense. At its December 31, 2021, year-end, Yummy Foods

Multiple Choice

• Prepaid insurance	2,375
  Insurance expense		2,375

• Prepaid insurance	625
  Insurance expense		625

• Insurance expense	625
  Prepaid insurance		625

• Insurance expense	625
  Prepaid insurance	2,375
  Insurance payable		3,000

would record which of the following adjusting entries?

Answer 1

Answer

· Insurance amount paid = $ 3000

· Period covered = 2 years = 24 months

· Period expired during 2021 = 5 months [Aug, Sept, Oct, Nov and Dec]

· Insurance expense to be debited for 5 months = $ 3000 x 5/24 = $ 625

· Insurance expense already debited = $ 3000

· Excess debit to Insurance expense to be credited = $ 3000 – 625 = $ 2375

· Correct Answer = Option #1
[Debit] Prepaid Insurance $ 2375
[Credit] Insurance expense $ 2375