Final answer:
The correct entries for Seng Co.'s insurance payment are a debit to Prepaid Insurance and a credit to Cash. The options provided are incorrect, as none reflect the proper accounting treatment for a prepaid expense. An adjusting entry would be needed on December 31 to account for the insurance used.
Step-by-step explanation:
The correct journal entry to record the insurance payment made by Seng Co. to Nance Insurance Co. on July 1, 2014, is to debit Prepaid Insurance and credit Cash for the amount of the insurance contract, which is $12,400. This recognizes the payment as an asset that will provide future benefits. The account Unearned Service Revenue under consideration in the provided options is not used here because it is related to the seller's perspective of deferred revenue, not the buyer's. Therefore, none of the provided options are correct.
On December 31, 2014, an adjusting entry is needed to record the expired portion of the insurance as an expense. Since the insurance contract is for 2 years, and only 6 months have passed, Seng Co. would recognize one-fourth (6/24) of the contract as an expense. The adjusting entry would be to debit Insurance Expense for $3,100 (which is $12,400 divided by 4) and credit Prepaid Insurance for the same amount. This reflects the expired portion of the premium that has been used up during the six months.