On October 1, Year 1, Wilson Company paid cash for an insurance policy that would provide protection for a one-year term. Which of the following shows how the required adjusting entry on December 31, Year 1 will affect Wilson's financial statements?

Question

Quizplus · Accepted Answer

When Wilson Company paid cash for the insurance policy on October 1, Year 1, they would have recorded it as a prepaid expense. However, at the end of the year (December 31, Year 1), as the insurance policy has only covered a portion of the term it was paid for, an adjusting entry is required to recognize the portion of the insurance that has expired (i.e., has been used up) during the year.

This adjusting entry will decrease the amount of Wilson Company's prepaid expenses and increase its expenses for the year. This is because the portion of the insurance policy that has expired is no longer an asset (as it has been used up), and it represents an expense that was incurred during the year.

Therefore, Option B is the correct choice as it correctly reflects the impact of the required adjusting entry on Wilson Company's financial statements on December 31, Year 1.

On October 1, Year 1, Wilson Company Paid Cash for an Insurance