Question

On January 1, a company purchased a five-year insurance policy for $2,500 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: Multiple Choice Debit Insurance Expense, $500; credit Prepaid Insurance, $500. Debit Prepaid Insurance, $500; credit Insurance Expense, $500. Debit Prepaid Insurance, $2,000; credit Insurance Expense, $2,000. Debit Insurance Expense, $500; credit Prepaid Insurance, $2,000. Debit Prepaid Insurance, $2,500; credit Cash, $2,500.

Answer 1

Answer:

Debit Insurance Expense, $500; credit Prepaid Insurance, $500

Explanation:

Cost of insurance policy = $2,500

Duration of policy = 5 years

Annual amortization  = $2,500/5

                                   = $500

To recognize the purchase at the start of the year,

Debit Prepaid insurance    $2,500

Credit Cash account          $2,500

To recognize amortization at the end of the year

Debit Insurance expense                 $500

Credit Prepaid insurance                  $500

The right option is Debit Insurance Expense, $500; credit Prepaid Insurance, $500