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On January 1 a company purchased a five-year insurance policy for $2,300 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 Insurance Expense, $460; credit Prepaid Insurance, $1,840.

B.)Debit Prepaid Insurance, $460; credit Insurance Expense, $460.

C.)Debit Prepaid Insurance, $1,840; credit Insurance Expense, $1,840.

D.)Debit Insurance Expense, $460; credit Prepaid Insurance, $460.

E.)Debit Prepaid Insurance, $2,300; credit Cash, $2,300.

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mchaid015

Answer:

Correct answer is D, Debit Insurance Expense, $460; credit Prepaid Insurance, $460

Explanation:

The company uses asset method of recording the purchase of insurance. Hence, at end of year end the company must recognize the expire portion of the policy and charge it against insurance expense.

$2,300 / 5 years = $460 (annual insurance expense)

Entry:

Debit Insurance expense $460

Credit Prepaid insurance $460

The balance of the prepaid insurance at the end of first year is $1,840 (2,300 - 460).

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