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Cogswell Printers purchased a four year insurance policy on May 1, Year 2 for $12,000,effective immediately. The company expensed the full cost of the policy in Year 2. Theadjusting journal entry required at December 31, Year 2 will include a:________

a. Credit to prepaid insurance of $9,000
b. Debit to insurance expense of $3,000
c. Credit to insurance expense of $2,000
d. Debit to prepaid insurance of $10,000
e. None of the above

Respuesta :

Answer:

d. Debit to prepaid insurance of $10,000

Explanation:

The company has paid for insurance that covers a period of 4-year, hence, based on the matching concept it is expected that the insurance cost would be expensed over 4 years as well.

However, the company has debited the whole $12,000 to insurance expense in year 1, hence, we need to adjust for the remaining cost of insurance for the future period.

Insurance expense for  the 8-month period(May-Dec)=$12,000*8/48=$2000

Note there are 48 months in 4 years

balance of insurance paid=$12,000-$2,000=$10,000

The $10,000 would be credited to insurance in order to reduce the insurance recognized earlier as $12,000 to only $2,000 while prepaid insurance is debited with $10,000

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