Question

X Company prepares annual financial statements. On May 1, 2019, the Company paid $42,000 in advance for a two-year insurance policy. After the adjusting entry on December 31, 2019, what will X Company's 2019 financial statements show?

A. Prepaid Insurance, $36,750;   Insurance expense, $5,250
B. Prepaid Insurance, $42,000; Insurance expense, $0
C. Prepaid Insurance, $28,000; Insurance expense, $14,000
D. Prepaid Insurance, $5,250;   Insurance expense, $36,750
E. Prepaid Insurance, $14,000; Insurance expense, $28,000
F. Prepaid Insurance, $0; Insurance expense, $42,000

Answer 1

On May 1 2019 payment is made for 2 years which means some part of payment are for this year and left are for next year. This year amount is recorded as insurance expenditure and next year amount is recorded as prepaid insurance.

420000 amount is paid for 2 years. It means this payment is for 24 months. So 1 month payment is 42000/24= 1750

So for this year exp. Is 1750*8= 14000

From may month this year left is only 8 months

Option C is correct answer.

This q is solved by taking basis of calendar year.

Dear if you follow any other period as accounting period.

Let me know because change in year leads to change in months. So our answer will also changed.