Question

Use the following information to answer Questions 1-6:

                The unadjusted trial balance for a company as of Dec. 31, 2015 appears below.

                                                                                                 Debit                       Credit

                                Cash                                                       $10,000
Accounts receivable    12,000
Inventory    15,000
Prepaid insurance 4,800

Equipment         9,000
Accumulated depreciation $ 3,600
Accounts payable       1,000

Unearned revenue         9,400
Common stock    22,000
Retained earnings      7,500
Dividends      1,000
Revenue    28,600


Salary expense      8,200
Supplies expense                                   1,500
Utility expense 800
Rent expense      3,600
Advertising expense                                1,200
Cost of goods sold     5,000                    

                                                                                    $72,100      $72,100

                Additional data:

1. Supplies were purchased for $1,500 during the year and debited to supplies expense. Supplies used during the year amounted to $700.
2. Accrued salaries on December 31, 2015 amount to $600.
3. Of the amount in unearned revenue, $5,500 had still not been earned at year-end.
4. The equipment was purchased on January 1, 2013. It is being depreciated over a 5 year life using the straight line method of depreciation with no salvage value.
5. The prepaid insurance account reflects the annual premium which was paid on October 1, 2015.

The adjusting journal entry to record item (E) above would include a:

	A.	debit to Prepaid Insurance for $1,200
	B.	credit to Prepaid Insurance for $800
	C.	credit to Insurance Expense for $2,200
	D.	credit to Insurance Expense for $800
	E.	debit to Insurance Expense for $1,200

Answer 1

Item E is the prepaid insurance portion of the annual premium which was paid on 1 Oct, 2015.

Year ending is Dec 2015 (3 months after the date of annual premium), so in order to record insurance expenses below journal entry needs to be passed-:

Insurance Expenses ($4,800 / 12 months * 3 months) A/c Dr. $1,200

To prepaid insurance $1,200

(Being insurance expenses booked for 3 months out of 12 months of insurance period)

On the basis journal entry, we can see that option (e) is the correct answer.