The prepaid insurance account of Tan Traders shows a balance of $600, representing a payment on 1 July 2014 of a two-year insurance premium. After adjustment at 31 December 2014, the close of the annual accounting period:
A) insurance expense in the income statement is $600 and prepaid insurance in the balance sheet is $0.
B) insurance expense in the income statement is $150 and prepaid insurance in the balance sheet is $450.
C) insurance expense in the income statement is $0 and prepaid insurance in the balance sheet is $600.
D) insurance expense in the income statement is $300 and prepaid insurance in the balance sheet is $300.

Question

Quizplus · Accepted Answer

Prepaid insurance is a current asset account that represents the amount paid for insurance coverage that has not yet been used. As of 31 December 2014, half of the insurance premium has been used (6 months out of 24 months), which means that the company should recognize half of the payment as an expense for the year. 
Therefore, the adjusting entry for prepaid insurance at the end of the accounting period is:
Insurance expense     $150
Prepaid insurance          $150
This means that insurance expense in the income statement is $150 and prepaid insurance in the balance sheet is $450 ($600 - $150).

The Prepaid Insurance Account of Tan Traders Shows a Balance