Question

On January 1, a company purchased a five-year insurance policy for $3,700 with coverage starting immediately. If the purchase was recorded in the Prepaid Insurance account, and the company records adjustments only at year-end, the adjusting entry at the end of the first year is:
a. debit Insurance Expense, $740; credit Prepaid Insurance $740
b. debit Prepaid Insurance, $3,700; credit Cash, $3,700
c. debit Prepaid Insurance, $2,960; credit Insurance Expense, $2,960
d. debit Insurance Expense, $740; credit Prepaid Insurance $2,960
e. debit Prepaid Insurance, $740; credit Insurance Expense, $740

Answer 1

Answer:

a. debit Insurance Expense, $740; credit Prepaid Insurance $740

Explanation:

Insurance payment for 5 years = $3,700

On January 1, $3,700 has been recorded as prepaid expense by debiting prepaid insurance and crediting cash.

At the end of first year an insurance expense for one year is accrued and should be recorded by transferring balance of $740 from prepaid insurance account to insurance expense account  

Insurance payment per year = $3,700 / 5 = $740 per year

The adjusting entry will be

Debit      Insurance Expense    $740

Credit     Prepaid Insurance     $740