24. Lightning Yellow Company had a December 31 year end. Here is some informatio

Question

24. Lightning Yellow Company had a December 31 year end. Here is some information about the company's insurance policies: Months of Policy Date of Purchase Coverage Cost A April 1, 2013 B April 1, 2014 24 36 12 $14,400 $12,960 $2,400 August 1, 2015 The total premium for each policy was paid in full (for all months) at the purchase date, and the Prepaid Insurance account was debited for the full cost. Year-end adjusting entries for Prepaid Insurance were properly recorded in all prior years. What adjusting entry is needed at December 31, 2015? Insurance Expense 7,120 A. Prepaid Insurance 7,120 Insurance Expense 1,160 1,160 Prepaid Insurance Insurance Expense 13,920 C. Prepaid Insurance 13,920 7,520 Insurance Expense 7.520 D. Prepaid Insurance E. none of these are correct

Explanation / Answer

Policy A:

Policy taken date = April 1,2013

Months of coverage = 24

Total months of policy in 2013 and 2014 = 9+12 = 21

Months left which is to be covered in 2015 = 3

Amount of insurance expenses to be recorded in 2015 =

(14400/24)*3 = 1800

Policy B:

Policy taken date = April 1,2014

Months of coverage = 36

Total months of policy in 2014 = 9

Months to be covered in 2015 = 12

Amount of insurance expenses to be recorded in 2015 =

(12960/36)*12 = 4320

Policy C:

Policy taken date = August 1,2015

Months of coverage = 12

Months to be covered in 2015 = 5

Amount of insurance expenses to be recorded in 2015 =

(2400/12)*5 = 1000

Total insurance expenses to be adjusted = 1800+4320+1000

= 7120

Journal entry:

Insurance expense 7120

Prepaid Insurance 7120

Answer is A.

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