Question

25. Moe compant paid $12,000 cash in advance for a one-year insurance policy on August 1,2012....

25. Moe compant paid $12,000 cash in advance for a one-year insurance policy on August 1,2012. The appropriate adjusting entry on December 31, 2012, will

A. Decrease assests by $12,000

B. Decrease equity by $7,000

C. Increase liabilities by $7,000

D. Decrease equity by $5,000

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Answer #1

Answer is D. Decrease equity by $5,000

Explanation is as follows: Insurance expired during the year for 5 months: ($12,000*5/12) =$5,000

Journal entry for the same is as follows:

Insurance expense Account Dr.    $ 5,000

     Prepaid insurance Account                   $ 5,000

As the insurance expense has increased by $5,000, this will have an effect of decreasing the equity by $5,000

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