Question

On October 1 of Year 1 Lesikar Company paid $1,200 cash for an insurance policy that would provide protection for a one year term. Which of the following adjusting entries would be required on December 31, Year 1 to recognize Insurance expense? a. Insurance Expense 300 Prepaid insurance 300 b. Insurance Expense 900 Prepaid Insurance 900 c. Prepaid Insurance 300 Insurance Expense 300 d. Prepaid insurance 900 Insurance Expense 900

Answer 1

The answer is a. Dr Insurance expenses 300, Cr Prepaid insurance 300

Step-by-step explanation:

Please find the detailed calculation and explanation which are shown as below:

As the insurance policy lasts for 12 months and the cost Lesikar Company paid for the whole policy was $1,200, insurance expense for one month is 1,200/12 = $100.

As the insurance policy was entered into by Lesikar Company on October 1st Y1, at the end of Y1, that is December 1st Y1, 03 months of insurance policy has been passed, meaning 03 months of insurance expenses has been incurred, which amounted to $300 ( insurance expense for one month x 3 months = 100 x 3).

Thus, the $300 insurance expenses should be recorded (Dr to show increase in expense) to reflect the insurance expense incur in Y1. Subsequently, prepaid expenses ( asset account) goes down by the same amount of $300 ( Cr to show decrease in asset).