Percy's Kitchens paid $18,200 for a one-year insurance policy on January 1 and recorded the entire amount as prepaid insurance. Before preparing its March 31 financial statements the company should make which of the following adjusting entries?

Question

Quizplus · Accepted Answer

The correct adjusting entry is to debit Insurance Expense and credit Prepaid Insurance for $4,550, which represents the expense for three months (January through March) of the one-year policy. The annual cost is $18,200, so the monthly cost is $18,200 / 12 = $1,516.67. For three months, the expense is $1,516.67 * 3 = $4,550. This adjusts the Prepaid Insurance account for the portion of the policy that has expired and recognizes the insurance expense for the period.

Percy's Kitchens Paid $18,200 for a One-Year Insurance Policy on January