Question

X Company prepares annual financial statements. On September 1, 2017, X Company paid $42,000 in advance for a two-year insurance policy. After the adjusting entry on December 31, 2017, what will X Company's 2017 financial statements show?

a. Prepaid Insurance, $10,500;   Insurance expense, $31,500
b. Prepaid Insurance, $31,500;   Insurance expense, $10,500
c. Prepaid Insurance, $7,000;   Insurance expense, $35,000
d. Prepaid Insurance, $0;   Insurance expense, $42,000
e. Prepaid Insurance, $35,000;   Insurance expense, $7,000
f. Prepaid Insurance, $42,000;   Insurance expense, $0

Answer 1

Correct answer---- e. Prepaid Insurance, $35,000;   Insurance expense, $7,000

Following adjusting entry would have been made

Date	General Journal	Debit	Credit
Dec 31	Insurance expense	$      7,000.00*
	Prepaid insurance		$    7,000.00

*42000/24 x 4

Statement of accounts balances
	Insurance expense	Prepaid insurance
Balance on Sep 1	$               -	$ 42,000.00
Adjustment on Dec 31	$ 7,000.00	$ (7,000.00)
Ending balance on Dec 31	$ 7,000.00	$ 35,000.00