On 1 May 2016,A Ltd pays $9600 for a one-year fire insurance policy that expires on 30 April 2017.What is the journal entry made by A Ltd on 30 June 2016?

Question

Quizplus · Accepted Answer

A Ltd pre-paid the one-year fire insurance policy on May 1, 2016, which means that $9600 was debited to the Prepaid insurance account. As of June 30, 2016, two months have passed since the policy was purchased, and the amount of insurance that has already been used up as an expense is $1600 (2/12 of $9600). Therefore, A Ltd should debit Insurance expense for $1600 and credit Prepaid insurance for $1600 to reflect the amount of insurance that has been used up during the period. So, the journal entry will be:

Dr Insurance expense $1600 
Cr Prepaid insurance $1600

On 1 May 2016,A Ltd Pays $9600 for a One-Year