Question

X Company prepares annual financial statements. On May 1, 2019, the Company paid $51,000 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?

Prepaid Insurance, $6,375;   Insurance expense, $44,625
Prepaid Insurance, $44,625;   Insurance expense, $6,375
Prepaid Insurance, $34,000; Insurance expense, $17,000
Prepaid Insurance, $17,000; Insurance expense, $34,000
Prepaid Insurance, $51,000; Insurance expense, $0
Prepaid Insurance, $0; Insurance expense, $51,000

Answer 1

Calculations-

Insurance amount for 2 years = 51,000

Amount for one month = 51,000 / 24 = 2,125

For 8 months (May 2019 to Dec 2019) = 2,125 x 8 = 17,000

Remaining prepaid amount = 51,000 - 17,000 = 34,000

Therefore, Correct option: Prepaid Insurance, $34,000; Insurance expense, $17,000

Explanation-

Total cost for 2 years is 51000. On 1st May 2019, the company would have recorded 51000 in prepaid insurance amount. On Dec 31, we have utilized the insurance for 8 months i.e. May to Dec. Therefore, we reduce the 8 month's amount from prepaid insurance i.e 51000-17000 = 34000 and we add 8 month's amount i.e. 17000 in insurance expense.

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