Asked by Arvind Sethi on Jul 21, 2024
Verified
On June 1, 2010, Barker Industries purchased a one-year comprehensive insurance policy and paid the annual premium of $12, 000.Which of the following could not result from the acquisition of the insurance coverage on June 1?
A) $7, 000 of insurance expense for the year ended December 31, 2010
B) a $12, 000 debit to Insurance Expense on June 1, 2010
C) $5, 000 of prepaid insurance at December 31, 2010
D) a $12, 000 credit to Prepaid Insurance on June 1, 2010
Comprehensive Insurance
An insurance coverage that protects against a wide range of perils, excluding certain specified exclusions.
Prepaid Insurance
Prepaid insurance refers to payments made for insurance coverage before the actual coverage period, recognized as an asset on the balance sheet until used.
Insurance Expense
The cost incurred by a business for insurance policies it maintains for protection against risks.
- Comprehend the method for preparing adjusting entries for prepaid expenses.
Verified Answer
BK
bhuda kannadiJul 28, 2024
Final Answer :
D
Explanation :
The correct accounting treatment for the purchase of an insurance policy would involve debiting Prepaid Insurance and crediting Cash (or a similar account) for $12,000 on June 1, 2010. A credit to Prepaid Insurance, as suggested in option D, is incorrect because Prepaid Insurance is an asset account that should be increased (debited) when a payment is made for insurance coverage that extends into the future.
Learning Objectives
- Comprehend the method for preparing adjusting entries for prepaid expenses.