Multiple Choice
In a classified balance sheet, prepaid expenses (such as prepaid insurance) are reported in which section?
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3. Accrual Accounting Concepts
Introduction to Adjusting Journal Entries and Prepaid Expenses
Multiple Choice
On January 1, a company purchased a two-year insurance policy at \$2,400 per year in cash. At this time, the company included the entire value of the policy in Prepaid Insurance. The coverage began immediately. The adjusting entry necessary when preparing the June 30 financial statements would include:
A
Debit Prepaid Insurance \$1,200; Credit Insurance Expense \$1,200
B
Debit Insurance Expense \$1,200; Credit Prepaid Insurance \$1,200
C
Debit Prepaid Insurance \$2,400; Credit Insurance Expense \$2,400
D
Debit Insurance Expense \$2,400; Credit Prepaid Insurance \$2,400
Verified step by step guidance1
Identify the total cost of the insurance policy, which is \$2,400 per year for two years, totaling \$4,800.
Determine the amount of insurance expense that should be recognized by June 30. Since the policy began on January 1, six months of coverage have been used by June 30.
Calculate the insurance expense for six months: \$2,400 per year divided by 12 months equals \$200 per month. Multiply \$200 by 6 months to get \$1,200.
Prepare the adjusting entry to recognize the insurance expense for the six months. Debit Insurance Expense for \$1,200 to reflect the cost of insurance used.
Credit Prepaid Insurance for \$1,200 to reduce the asset account, as this portion of the prepaid insurance has now been expensed.
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