Question

A company purchases a one-year insurance policy on June 1 for $2,760. The adjusting entry on December 31 is: a. debit Insurance Expense $1,380 and credit Prepaid Insurance $1,380 b. debit Insurance Expense $1,150 and credit Prepaid Insurance $1,150 c. debit Insurance Expense $1,610 and credit Prepaid Insurance $1,610 d. debit Prepaid Insurance $1,380 and credit Cash $1,380

Answer 1

The correct adjusting entry for the insurance policy is option c: debit Insurance Expense $1,610 and credit Prepaid Insurance $1,610, as it reflects the expense for 7 months of coverage out of the one-year policy.

Step-by-step explanation:

The policy was purchased on June 1 for $2,760.

Since the policy covers one year, we divide the total cost by 12 months to find the monthly insurance expense, which is $230 ($2,760 ÷ 12).

From June 1 to December 31, there are 7 months.

Therefore, the insurance expense for 7 months is 7 x $230 = $1,610.

The adjusting entry on December 31 should be a

Insurance Expense A/c $1,610

To Prepaid Insurance A/c $1,610,

Answer 2

The correct adjusting entry on December 31 for the insurance policy would be to debit Insurance Expense by $1,610 and credit Prepaid Insurance by $1,610. This entry reflects the expense for the seven months of insurance coverage the company has used.

Step-by-step explanation:

The subject of this question involves understanding the concept of prepaid expenses and adjusting entries in accounting, which is a part of financial accounting. Upon purchasing the insurance policy, the company should have recorded it as a Prepaid Insurance asset. As time passes, a portion of this asset is used up as the benefit of the insurance coverage is consumed.

Given that the insurance policy was purchased for $2,760 on June 1 and is for a one-year term, we must calculate the insurance expense for the months that have elapsed by December 31 of the same year, which is seven months. The monthly expense is $2,760 divided by 12 months, which gives us $230 per month. For seven months, the total expense is $230 times 7, equating to $1,610.

The correct adjusting entry on December 31 to reflect the insurance expense for seven months would be: Debit Insurance Expense $1,610 and Credit Prepaid Insurance $1,610. This entry recognizes the cost of the insurance that has been used up during the period from June 1 to December 31.