X Company prepares annual financial statements. On October 1, 2015, X Company pa

Question

X Company prepares annual financial statements. On October 1, 2015, X Company paid $25,000 in advance r a two-year insurance policy. After the adjusting entry on December 31, 2015, what will the financial statements how? Prepaid Insurance, $25,000; Insurance expense, $0 Prepaid Insurance, $3,125; Insurance expense, $21,875 Prepaid Insurance, $0; Insurance expense, $25,000 Prepaid Insurance, $21,875; Insurance expense, $3,125 Prepaid Insurance, $6,250; Insurance expense, $18,750 Prepaid Insurance, $18,750; Insurance expense, $6,250

Explanation / Answer

Correct option (D).

Insurance expense for 3 months (Oct 2015 to Dec 2015) = $25,000 x (3 / 24) = $3,125

Prepaid insurance = $(25,000 - 3,125) = $21,875

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