On March 31, 2014, the Turi Company purchased a two-year fire insurance policy. Turi recorded the purchase by debiting Prepaid Insurance and crediting Cash for $10,000. Which of the following adjusting entries should Trident prepare at the end of 2014?

Question

Quizplus · Accepted Answer

The adjusting entry should reduce the Prepaid Insurance account and increase the Insurance Expense account for the amount representing the insurance that has expired during the period.

Since Turi purchased a two-year fire insurance policy for $10,000, the annual insurance expense is $5,000 ($10,000 divided by 2).

Therefore, at the end of 2014 (which is the first year of the policy), half of the insurance has expired, or $5,000 ($10,000 divided by 2).

To record this, Prepaid Insurance should be credited (to reduce the account balance) and Insurance Expense should be debited (to recognize the amount that has expired).

The adjusting entry would be:

Insurance Expense 3,750 
Prepaid Insurance 3,750

On March 31, 2014, the Turi Company Purchased a Two-Year