Question

Stahl Company paid $7,800 on May 1, 2017 for insurance coverage for a one year period beginning on that date. The adjusting entry required to recognize insurance expense on December 31, 2017 would have what effect on the financial statements?

Answer 1

Debit insurance expense $5,200

Credit prepaid insurance $5,200

A decrease of $5,200 in the current asset,that will be charged to expense account.

Step-by-step explanation:

An adjusting entry to recognize the expire portion of the insurance must be done at the year end. In this entry, we will recognize the expire portion of the prepaid insurance that was acquired on May 1.

($7,800 / 12 months = $650 x 8 months = $5,200)

The effect on financial statement is that, prepaid insurance which is a current asset will decreased by $5,200 makes the balance of the prepaid insurance decreased to $2,600 at year end.