Answer:
Insurance expense .......................Dr $700
Prepaid insurance $700
(Being insurance expense recognized
for the year)
Explanation:
Prepaid insurance is the part of premium that has been paid in advance. It has been paid but not accrued yet. The company following accrual accounting charge the amount paid in advance to prepaid insurance account. At the end of the year, adjustment entry is passed to recognize the portion of prepaid insurance for the current year by charging it to insurance expense.
In this case insurance premium of $3,500 for 5 years is paid in advance. Insurance expense per year is 3,500 / 5 = $700. In the current year $700 will be recognized as insurance expense. Journal entry is:
Particulars Debit Credit
Insurance expense $700
Prepaid insurance $700
(Being insurance expense
recognized for the year)