Arid Company paid $1,704 on June 1,2013,for a two-year insurance policy and recorded the entire amount as Insurance Expense.The December 31,2013,adjusting entry is
A) debit Prepaid Insurance and credit Insurance Expense,$497.
B) debit Insurance Expense and credit Prepaid Insurance,$497.
C) debit Insurance Expense and credit Prepaid Insurance,$1,207.
D) debit Prepaid Insurance and credit Insurance Expense,$1,207.

Question

Quizplus · Accepted Answer

The insurance policy covers two years, so the annual cost is $1,704 / 2 = $852. From June 1 to December 31 is 7 months, so 7/12 of the annual cost is used, which is $852 * (7/12) = $497. The remaining balance for the next 17 months is $1,704 - $497 = $1,207, which should be recorded as Prepaid Insurance (an asset), not an expense. Therefore, the correct entry is to debit Prepaid Insurance and credit Insurance Expense for $1,207, to adjust the initially recorded expense to the correct amount for the period.

Arid Company Paid $1,704 on June 1,2013,for a Two-Year Insurance