On January 1, 2020, Peach Company purchased a five-year insurance policy for $5,000. If the cost was debited to Prepaid Insurance, the adjusting entry at the end of 2020 is
A) Debit Prepaid Insurance, $1,800; credit Cash, $1,800
B) Debit Prepaid Insurance, $1,000; credit Insurance Expense, $1,000
C) Debit Prepaid Insurance, $360; credit Insurance Expense, $360
D) Debit Insurance Expense, $360; credit Prepaid Insurance, $360
E) Debit Insurance Expense, $1,000, credit Prepaid Insurance $1,000

Question

Quizplus · Accepted Answer

The correct answer is E because the insurance policy costs $5,000 for five years, which means the annual expense is $1,000 ($5,000 / 5 years). At the end of 2020, an adjusting entry is needed to recognize the insurance expense for one year. This entry debits Insurance Expense and credits Prepaid Insurance for $1,000, reflecting the expense for the year and reducing the prepaid insurance asset accordingly.

On January 1, 2020, Peach Company Purchased a Five-Year Insurance