The Prepaid Insurance account of Stephen's Spas shows a balance of $3000, representing a two-year insurance premium paid on 1 February 2018. After recording the adjustment on 30 June 2018, the end of the accounting period:
A) Insurance expense in the income statement is $3000 and Prepaid Insurance in the balance sheet is $0.
B) Insurance expense in the income statement is $625 and Prepaid Insurance in the balance sheet is $2375.
C) Insurance expense in the income statement is $2375 and Prepaid Insurance in the balance sheet is $625.
D) Insurance expense in the income statement is $750 and Prepaid Insurance in the balance sheet is $2250.

Question

Quizplus · Accepted Answer

The adjustment on 30 June 2018 represents the amount of insurance that has been used up or expired from the policy. Since 5 months have passed since the policy was purchased (from February to June), 5/24 or 21% of the premium has been used up.

$3000 x 21% = $625

Therefore, the Insurance expense in the income statement is $625 and the Prepaid Insurance in the balance sheet is $2375 ($3000 - $625 = $2375).

The Prepaid Insurance Account of Stephen's Spas Shows a Balance