Asked by Christian Poncio on May 31, 2024
Verified
On January 1,a company purchased a five-year insurance policy for $1,800 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 Prepaid Insurance,$1,800; credit Cash,$1,800.
B) Debit Prepaid Insurance,$1,440; credit Insurance Expense,$1,440.
C) Debit Prepaid Insurance,$360; credit Insurance Expense,$360.
D) Debit Insurance Expense,$360; credit Prepaid Insurance,$360.
E) Debit Insurance Expense,$360; credit Prepaid Insurance,$1,440.
Prepaid Insurance
Prepaid insurance represents payments made for insurance coverage periods that have not yet occurred, and is recorded as an asset on the company's balance sheet.
Insurance Expense
The cost associated with purchasing insurance policies to protect a business from certain risks, recorded as an expense.
Adjusting Entry
Adjusting entries are journal entries made in accounting to update ledger accounts at the end of a reporting period, ensuring that revenues and expenses are recognized in the period they occur.
- Learn to recognize and make distinctions between prepaid expenses, accrued expenses, and unearned revenues.
- Apprehend and apply the notion of depreciation, analyzing its impact on financial accounts.
Verified Answer
ZK
Zybrea KnightJun 04, 2024
Final Answer :
D
Explanation :
The correct adjusting entry at the end of the first year is to recognize the insurance expense for that year. The total cost of the insurance policy is $1,800 for five years, so the annual expense is $1,800 / 5 = $360. The entry debits Insurance Expense and credits Prepaid Insurance to reflect the expense for one year of coverage.
Learning Objectives
- Learn to recognize and make distinctions between prepaid expenses, accrued expenses, and unearned revenues.
- Apprehend and apply the notion of depreciation, analyzing its impact on financial accounts.