Jett Company purchased an umbrella liability policy in January,2015 and paid a five-year premium for $200,000.It was recorded as Insurance Expense.The error was discovered in early 2018 when the accountants were reconciling 2017 for adjusting entries.What is the proper entry to correct the error at December 31,2017? (Ignore income taxes.)
A)No entry required because it will self-correct in two more years.
B) Retained Earnings-Prior Period Adj. 120,000
C) Prepaid Insurance 160,000
D) Retained Earnings -Prior Period Adj. 160,000

Question

Jett Company purchased an umbrella liability policy in January,2015 and paid a five-year premium for $200,000.It was recorded as Insurance Expense.The error was discovered in early 2018 when the accountants were reconciling 2017 for adjusting entries.What is the proper entry to correct the error at December 31,2017? (Ignore income taxes.)
A)No entry required because it will self-correct in two more years. 
B) Retained Earnings-Prior Period Adj. 120,000 
C) Prepaid Insurance 160,000 
D) Retained Earnings -Prior Period Adj. 160,000

Quizplus · Accepted Answer

The entry to correct the error would be to debit Prepaid Insurance for $160,000 (the remaining balance of the prepaid premium as of December 31, 2017) and credit Retained Earnings - Prior Period Adjustment for $160,000. This will reduce the amount of insurance expense recorded in 2015 and increase retained earnings to reflect the correct amount of the five-year premium paid. Option A is not correct because the error needs to be corrected through an adjusting entry. Option B is not correct because the entire premium was not recognized as an expense in 2015. Option C is not correct because it would increase the balance in prepaid insurance, which is not accurate as the policy had already been in effect for three years by December 31, 2017.

Jett Company Purchased an Umbrella Liability Policy in January,2015 and Paid