Final answer:
The question relates to the accounting treatment of prepaid insurance and requires an adjusting entry to properly reflect the insurance expense. Insurance principles are also examined through an example illustrating how premiums are determined based on the cost of potential claims.
Step-by-step explanation:
The subject of the question concerns the concept of prepaid insurance and its adjustment at the end of the accounting period. On December 31, H&R Tacks has an unadjusted prepaid insurance of $5,760, and the insurance was bought on July 1 to provide coverage for 24 months; however, the given trial balance shows an insurance expense of $0. An adjustment entry is required to record the insurance expense incurred for the coverage period from July 1 to December 31, which is 6 months of the 24-month coverage period.
To provide clarity, let's explore an unrelated example that deals with the principles of insurance premiums and pay-outs. In this scenario, 100 drivers each pay an annual insurance premium of $1,860. If all drivers pay this premium, the insurance company will collect $186,000 annually, which is the anticipated amount needed to cover the costs of accidents for the year. This is based on estimated costs from door dings, medium-sized, and large accidents, demonstrating how premiums are set in relation to potential claims.