On October 1, 2014, Adams Company paid $3,120 for a two-year insurance policy wi
ID: 2488624 • Letter: O
Question
On October 1, 2014, Adams Company paid $3,120 for a two-year insurance policy with the insurance coverage beginning on that date. As of December 31, 2014, which of the following account balances are correct after adjusting entries have been made?
A. Prepaid insurance $2,730, and Insurance expense $390.
B. Prepaid insurance $0, and Insurance expense $3,120.
C. Prepaid insurance $3,120, and Insurance expense $0.
D. Prepaid insurance $1,560, and Insurance expense $1,560.
On October 1, 2014, Adams Company paid $3,120 for a two-year insurance policy with the insurance coverage beginning on that date. As of December 31, 2014, which of the following account balances are correct after adjusting entries have been made?
Explanation / Answer
Answer: A. Prepaid insurance $2,730, and Insurance expense $390
Monthly insurance expense = $3120 / 24 months = $130
Total insurance expense for three months (from Oct 1, 2014 to Dec 31, 2014)
= 3 x $130 = $390
Balance in prepaid insurance expense account after the expiry of three months = $3120 - $390 = $2730.
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