Answer:
$5,000
Explanation:
The journal entry to record the purchase of the 4 year insurance policy should be:
August 31st, 2014, purchase of insurance policy
Dr Prepaid insurance 60,000
Cr Cash 60,000
Both prepaid insurance and cash are both asset accounts.
By December 31st, the journal entry to record insurance expense should be as follows:
December 31st, 2014, adjustment entry for 4 months of insurance expense
Dr Insurance expense 5,000
Cr Prepaid insurance 5,000
insurance expense = ($60,000 / 4 years) x 4/12 = 5,000
