On April 1, 2014, the premium on a one-year insurance policy was purchased for $3,000 cash with the insurance coverage beginning on that date. The books are adjusted only at year-end. Which of the following correctly describes the effect on the financial statements of the December 31, 2014 adjusting entry?

Question

Quizplus · Accepted Answer

Since the insurance policy was for one year and was purchased on April 1, the coverage period extends from April 1 to March 31 of the following year. Therefore, on December 31, 2014, nine months of insurance coverage would have been used up, leaving three months of prepaid insurance. The adjusting entry would decrease the prepaid insurance account by $2,250 (9/12 x $3,000) and increase the insurance expense account by the same amount. So, option C is the correct answer.

On April 1, 2014, the Premium on a One-Year Insurance