Malcolm Corporation purchased an insurance policy for three years beginning January 1, Year 2, and recorded the $6,000 premium in the Prepaid Insurance account.What adjusting entry is required to reflect the proper balances, in the insurance-related accounts at year-end, on December 31, Year 2?
A)Insurance Expense 2,000 Prepaid Insurance 2,000
B)Prepaid Insurance 2,000 Insurance Expense 2,000
C)Insurance Expense 4,000 Prepaid Insurance 4,000
D)Prepaid Insurance 4,000 Insurance Expense 4,000
E)Insurance Expense 6,000 Prepaid Insurance 6,000

Question

Quizplus · Accepted Answer

The insurance policy covers three years for a total of $6,000, so the annual expense is $2,000 ($6,000 / 3 years). At the end of Year 2, one year of the policy has been used, requiring an adjustment of $2,000 to Insurance Expense to reflect the cost of one year's insurance coverage, reducing Prepaid Insurance by the same amount.

Malcolm Corporation Purchased an Insurance Policy for Three Years Beginning