Question

On June 1. 2019. a firm purchased a 1-year insurance policy for $6.900 and paid the full premium in advance. The insurance expense associated with this policy for the year ending December 31, 2019, is Multiple Choice O $2,300 $6.900 O $4.025 O $4,600

Answer 1

. Credit Prepaid insurance is insurance premium paid in advance. It is a current asset. In this case, the journal entry when full premium is paid upfront: Date Particulars Debit June 1, 2019 Prepaid insurance $6,900 Cash (To record purchase of 1-year insurance policy) $6,900 At the end of the year, the expired portion of the insurance premium is recognized as insurance expense. Date Particulars Debit Credit December Insurance expense $4,025 31, 2019 Prepaid insurance $4,025 (To record expired portion of the insurance) Total period covered by the insurance policy = 1 year = 12 months Number of months expired; June to December = 7 months $6,900 Insurance expense = - - x 7 = $4,025