On August 1, Covington Motors pays £18,000 for insurance coverage for the next 12 months.On August 1, the firm records the following journal entry:

Question

Quizplus · Accepted Answer

This journal entry reflects the payment of £18,000 for insurance coverage, which is an expense that will be incurred over the next 12 months. Therefore, this payment should be recorded as a prepaid expense and not as an immediate expense. As a result, the correct journal entry is to debit Prepaid Insurance (an asset account) for £18,000 and credit Cash (an asset account) for £18,000. This records the fact that an asset has been acquired (prepaid insurance) and that cash has been used to pay for it. Option A is incorrect because it records the entire expense in August, rather than spreading it over 12 months. Option C is incorrect because it records the expense before it is incurred. Options D and E are incorrect because they recognize a liability for the insurance, which is not necessary since the payment has already been made.

On August 1, Covington Motors Pays £18,000 for Insurance Coverage