On January 1 a company purchased a five-year insurance policy for $1,800 with coverage starting immediately. If the purchase was recorded in the Prepaid Insurance account, and the company records adjustments only at year-end, the adjusting entry at the end of the first year is:
A) Debit Prepaid Insurance, $1,800; credit Cash, $1,800.
B) Debit Prepaid Insurance, $1,440; credit Insurance Expense, $1,440.
C) Debit Prepaid Insurance, $360; credit Insurance Expense, $360.
D) Debit Insurance Expense, $360; credit Prepaid Insurance, $360.
E) Debit Insurance Expense, $360; credit Prepaid Insurance, $1,440.

Question

Quizplus · Accepted Answer

The correct adjusting entry at the end of the first year is to debit Insurance Expense for $360 and credit Prepaid Insurance for $360. This reflects the expense of one year of the insurance policy ($1,800/5 years = $360 per year) and reduces the Prepaid Insurance account accordingly.

On January 1 a Company Purchased a Five-Year Insurance Policy