The prepaid insurance account of Megaton Ltd shows a balance of $1800 (net of GST)representing a payment on 1 July 2014 of a three-year insurance premium.Which of the following is the correct adjusting entry on 31 December 2014,the close of the annual accounting period?
$ $

Question

Quizplus · Accepted Answer

The prepaid insurance account represents a prepayment of insurance premium which has not yet been consumed. As the insurance is for three years, one-third of the premium amount should be allocated as an expense for the current year. Since six months of the insurance period have already elapsed, the adjustment entry would be:

Insurance expense ($1800/3 x 6/12) $300
Prepaid insurance $300

Therefore, the correct option is B.

The Prepaid Insurance Account of Megaton Ltd Shows a Balance