Safety First Supply Company purchased a 5-year insurance policy for $2,900. What would the adjusting entry be at the end of the first year?

Question

Quizplus · Accepted Answer

The adjusting entry at the end of the first year should reflect the portion of the insurance policy that has been used up or expired. Since it is a 5-year insurance policy, 1/5th or 20% of the policy would have expired by the end of the first year.

The adjusting entry should therefore be to debit Insurance Expense for 20% of $2,900 or $580, and credit Prepaid Insurance for the same amount.

Option A is incorrect because it would result in Insurance Expense being overstated for the entire $2,900 when only $580 has been used up.

Option B is incorrect because there is no cash transaction involved in this adjusting entry.

Option D is also incorrect because it would only reflect the cash paid for the insurance policy and not the portion that has been used up.

Safety First Supply Company Purchased a 5-Year Insurance Policy for $2,900