Question

Gibson Company paid $3,600 on June 1, 2010 for a two-year insurance policy and recorded the entire amount as Insurance Expense. The December 31, 2010 adjusting entry isa. debit Insurance Expense and credit Prepaid Insurance, $1,050.b. debit Insurance Expense and credit Prepaid Insurance, $2,550.c. debit Prepaid Insurance and credit Insurance Expense, $1,050d. debit Prepaid Insurance and credit Insurance Expense, $2,550.

Answer 1

Answer:

d. debit Prepaid Insurance and credit Insurance Expense, $2,550.

Explanation:

Provided insurance expense paid on 1 June $3,600 for a period of 2 years.

this is recorded as an expense, now on December 31 this will be transferred to Prepaid insurance also.

Amount to be transferred = $3,600 \times \frac{17}{24} = 2,550$

Because the insurance is of 2 years and for the current year it is only for 7 months 1 June to 31 December so remaining (12 months $\times$ 2) - 7 = 17 months is for next upcoming period.

For this entry will be,

Prepaid Insurance Dr. $2,550

         To Insurance Expense       $2,550

Amount of prepaid insurance transferred to expense of insurance.