On January 1, a company purchased a five-year insurance policy for $1,800 with coverage starting immediately. If the purchase was recorded in the Prepaid Insurance account, and the company records adjustments only at year-end, the adjusting entry at the end of the first year is:
A) Debit Prepaid Insurance, $360; credit Insurance Expense, $360.
B) Debit Prepaid Insurance, $1,800; credit Cash, $1,800.
C) Debit Insurance Expense, $360; credit Prepaid Insurance, $360.
D) Debit Insurance Expense, $360; credit Prepaid Insurance, $1,440.
E) Debit Prepaid Insurance, $1,440; credit Insurance Expense, $1,440.

Question

Quizplus · Accepted Answer

The insurance expense for one year is $360 ($1,800/5 years). The adjusting entry should debit Insurance Expense and credit Prepaid Insurance for $360 to recognize the expense for the year.

On January 1, a Company Purchased a Five-Year Insurance Policy