On November 1, 2010, the Morrison Company purchased a two-year umbrella insurance policy for $3, 000 and recorded the transaction by debiting Prepaid Insurance and crediting Cash.Which of the following adjusting entries would be used by Morrison to properly account for prepaid insurance on December 31, 2010?
A)
$\begin{array} { c c }
\text { Insurance Expense } & 250 \
\text { Prepaid Insurance } & 250
\end{array}$
B)
$\begin{array}{lr}
\text { Prepaid Insurance } & 2,750 \
\text { Insurance Expense } & 2,750
\end{array}$
C)
Insurance Expense $ \quad 250 $
Accumulated Amortization-Insurance $ \quad 250 $
D)
$\begin{array}{lc}
\text { Prepaid Insurance } & 1,250 \
\text { Cash } & 1,250
\end{array}$

Question

On November 1, 2010, the Morrison Company purchased a two-year umbrella insurance policy for $3, 000 and recorded the transaction by debiting Prepaid Insurance and crediting Cash.Which of the following adjusting entries would be used by Morrison to properly account for prepaid insurance on December 31, 2010?
A)
$\begin{array} { c c } 
\text { Insurance Expense } & 250 \
\text { Prepaid Insurance } & 250
\end{array}$
B)
$\begin{array}{lr}
\text { Prepaid Insurance } & 2,750 \
\text { Insurance Expense } & 2,750
\end{array}$
C)
Insurance Expense $ \quad 250 $
Accumulated Amortization-Insurance $ \quad 250 $
D)
$\begin{array}{lc}
\text { Prepaid Insurance } & 1,250 \
\text { Cash } & 1,250
\end{array}$

Quizplus · Accepted Answer

The correct adjusting entry is to debit Insurance Expense and credit Prepaid Insurance for $250. This is because the $3,000 two-year policy equates to $1,500 per year or $125 per month. From November 1 to December 31, 2010, is two months, so the expense recognized should be $250 ($125 x 2 months).

On November 1, 2010, the Morrison Company Purchased a Two-Year Insurance Expense 250 Prepaid Insurance 250\begin{array} { c c } \text { Insurance Expense } & 250 \\\text { Prepaid Insurance } & 250\end{array} Insurance Expense Prepaid Insurance ​250250​

On November 1, 2010, the Morrison Company Purchased a Two-Year $\begin{array} { c c } \text { Insurance Expense } & 250 \\\text { Prepaid Insurance } & 250\end{array}$