Klothing Company, a U.S.clothing designer, manufacturer, and retailer, reported a balance in prepaid insurance of $90.7 million, based on its financial reports dated March 31, 2013, the end of its fiscal year.Assume that of this balance, $24 million relates to an insurance policy with two remaining months of coverage.Select the correct journal entries that Klothing would make on April 30, 2013 (Assume that the firm closes its books monthly.Klothing applies U.S.GAAP, and reports its results in millions of U.S.dollars.)

Question

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Since the prepaid insurance balance is $90.7 million, and $24 million relates to an insurance policy with two remaining months of coverage, the portion of the prepaid insurance that has been used up at the end of April is $24 million divided by 12 months (the total coverage period) multiplied by 2 months (the remaining coverage period), which is $4 million. Therefore, the journal entry will be Insurance Expense (to recognize the portion of insurance that has been used up) for $12 million (=$16 million - $4 million) and Prepaid Insurance (to record the remaining balance of insurance) for $12 million. Option (C) is the only choice that reflects this journal entry.