On January 1, 2015, 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 2015 is:
A)Debit Prepaid Insurance, $1,000; credit Insurance Expense, $1,000.
B)Debit Prepaid Insurance, $1,800; credit Cash, $1,800.
C)Debit Insurance Expense, $1,000, credit Prepaid Insurance $1,000.
D)Debit Prepaid Insurance, $360; credit Insurance Expense, $360.
E)Debit Insurance Expense, $360; credit Prepaid Insurance, $360.

Question

Quizplus · Accepted Answer

The adjusting entry at the end of 2015 should adjust the prepaid insurance account balance to reflect the portion of the policy that has already been used up (expired) during the year. Therefore, the Prepaid Insurance account should be credited and the Insurance Expense account should be debited. The amount of the adjustment can be calculated as follows: $5,000 ÷ 5 years = $1,000 per year. Since one year has passed, only $1,000 of the prepaid insurance cost has been used up, hence the adjusting entry should be Debit Insurance Expense, $1,000, credit Prepaid Insurance $1,000.

On January 1, 2015, Peach Company Purchased a Five-Year Insurance