Final answer:
The correct journal entry on July 1 is Debit Prepaid Insurance $12,400; Credit Cash $12,400. The correct adjusting entry on December 31 should be Debit Insurance Expense $3,100; Credit Prepaid Insurance $3,100, which represents 1/4th of the annual payment, not $6,200 as the insurance contract is for a 2-year period and six months have elapsed.
Step-by-step explanation:
The correct journal entry on July 1 for Seng Co. paying $12,400 to Nance Insurance Co. for a 2-year insurance contract should be: Debit Prepaid Insurance $12,400; Credit Cash $12,400. This initial entry records the insurance payment as an asset, which is the Prepaid Insurance account, as the insurance coverage spans over two years.
On December 31, an adjusting entry is needed to account for the insurance expense incurred for the period from July 1 to December 31 (6 months). The adjusting entry would be: Debit Insurance Expense $3,100; Credit Prepaid Insurance $3,100. This records the portion of the prepaid insurance that has been 'used up' or has expired during the six-month period, which is one quarter of the 2-year contract (6 months out of 24 months = 1/4th of $12,400).
So the correct answer is none of the options provided. Instead, the correct adjusting entry on December 31 should be for $3,100, not $6,200, because it represents 1/4 of the 2-year insurance expense that Seng Co. has incurred as of that date.