On July 1, 2017 Albacore Company paid $5,200 for a 1-year insurance policy. To record this transaction Albacore Company should
A) decrease cash and increase insurance expense.
B) decrease cash and increase prepaid insurance.
C) increase accounts payable and increase insurance expense.
D) increase cash and increase prepaid insurance.

Question

Quizplus · Accepted Answer

When paying for a 1-year insurance policy, the company is essentially prepaying for insurance coverage for the next 12 months. This is recorded as an asset called prepaid insurance. Therefore, option B is the correct answer. Option A is not correct because insurance expense is not recorded until the coverage is used up over the course of the year. Option C is not correct because there is no accounts payable involved in this transaction. Option D is not correct because the payment of cash is only half of the transaction; the other half is the creation of the prepaid insurance asset.

On July 1, 2017 Albacore Company Paid $5,200 for a 1-Year