Favre Company paid for insurance in advance. Which transaction will Favre record?

Question

Quizplus · Accepted Answer

Since Favre Company paid for insurance in advance, it means they have not yet used the insurance during the current accounting period. Therefore, the payment is recorded as an asset called Prepaid Insurance, which is debited, and a decrease in Cash, which is credited. Option A is incorrect, since it recognizes the expense immediately, which does not reflect the matching principle. Option C is incorrect because there is no liability created with insurance payments. Option D is incorrect because it does not recognize the creation of an asset.

Favre Company Paid for Insurance in Advance