Question

On July 1, Mesa Verde, Inc. purchased a 6-month insurance policy for $12,600. Prepaid Insurance was debited for the entire amount. The adjusting entries to recognize the expired cost were made each month. On December 31, when the annual financial statements are prepared, the appropriate adjusting journal entry would be ______.a) Prepaid Insurance $10,500; Insurance Expense $10,500 b) Insurance Expense$10,500; Prepaid Insurance $10,500 c) Insurance Expense $2,100; Prepaid Insurance $2,100 d) Prepaid Insurance $2,100; Insurance Expense $2,100

Answer 1

Answer:

Option C.

Dr Insurance Expense $2,100

Cr          Prepaid Insurance $2,100

Explanation:

The initial payment of $12,600 is for 6 months which means monthly charge of insurance is $2,100 ($12,600 / 6 months). The initial prepaid expense was recorded as under:

Dr Prepaid Insurance $2,100

Cr               Cash Account $2,100

At the end of each month, the insurance expense is recognized and the entry is as under:

Dr Insurance Expense $2,100

Cr          Prepaid Insurance $2,100