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 $22,000 in advance for a two-year insurance policy. After the adjusting entry on December 31, 2015, what will the financial statements show?

a. Prepaid Insurance, $22,000;   Insurance expense, $0
b. Prepaid Insurance, $2,750;   Insurance expense, $19,250
c. Prepaid Insurance, $0;   Insurance expense, $22,000
d. Prepaid Insurance, $19,250;   Insurance expense, $2,750
e. Prepaid Insurance, $5,500;   Insurance expense, $16,500
f. Prepaid Insurance, $16,500;   Insurance expense, $5,500

Explanation / Answer

d. Prepaid Insurance, $19,250;   Insurance expense, $2,750   Particulars Dr Amt Cr Amt Entry at time of payment Prepaid Insurance      22,000.00 To Cash    22,000.00 Adjusting Entry Insurance Expense Dr      2,750.00 To Prepaid Insurance      2,750.00 (22,000/24 *3) Balance in Prepaid Insurance = 22,000 - 2,750    19,250.00 Insurance Expense      2,750.00

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