Question

The company paid $600 cash for a 12-month prepaid insurance policy on the reclaimed furniture. What is the accounting treatment for this transaction?

a) Credit to Prepaid Insurance, Debit to Cash
b) Debit to Prepaid Insurance, Credit to Cash
c) Credit to Cash, Debit to Insurance Expense
d) Debit to Cash, Credit to Insurance Expense

Answer 1

The correct accounting transaction for the purchase of a prepaid insurance policy is a debit to Prepaid Insurance and a credit to Cash, reflecting an increase in an asset account and a decrease in cash.

Step-by-step explanation:

The correct accounting treatment for the transaction where the company paid $600 cash for a 12-month prepaid insurance policy on the reclaimed furniture is b) Debit to Prepaid Insurance, Credit to Cash. To record this transaction, the company should increase the Prepaid Insurance account with a debit because it represents a future benefit, and decrease the Cash account with a credit because cash is going out of the company.

Here is the journal entry:

• Debit Prepaid Insurance: $600
• Credit Cash: $600

The Prepaid Insurance account is an asset account that will be expensed over the period that the insurance covers, typically through monthly adjusting entries that allocate part of the cost to Insurance Expense.