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

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The adjusting entry is an asset use transaction. The asset account (prepaid insurance) decreases reflecting the use of insurance coverage. The expense recognition decreases the amount of net income and ultimately stockholders' equity (retained earnings). The cash flow occurred at the time the insurance was purchased. There is no cashflow effect at the time the expense is recognized on December 31.

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