Question

On December 31, 2016, Avery Corporation paid $18,000 for next year's insurance policy.

This transaction should be recorded as follows by Avery:

A. Insurance expense 18,000 Insurance payable 18,000
B. Prepaid insurance 18,000 Insurance payable 18,000
C. Prepaid insurance 18,000 Cash 18,000
D. Insurance expense 18,000 Cash 18,000

Answer 1

C. Prepaid insurance 18,000 debit

Cash 18,000 credit

Step-by-step explanation:

The company will do a mistake if it reocrd this as a mistake as it will be posting an expense for an evnt that take place during the next accounting cycle (2017) As the insurance will be outstanding during that period not the one ending.

Also it is not an expense as the insurance company now has the obligation to perform if something happens So we have an asset right now, through time and as long as the insurance is not executed we will declare the expenses.

But for now, it is an asset.