Question

.  Bland Foods purchased a two-year fire and extended coverage insurance policy on August 1, 2003, and charged the $4,200 premium to Insurance expense. At its December 31, 2003, year-end, Bland Foods would record which of the following adjusting entries?

                        A)Insurance expense                               875

                                    Prepaid insurance                                                 875

                        B)  Prepaid insurance                                875

                                    Insurance expense                                                 875

                        C)  Insurance expense                               875

                              Prepaid insurance                             3,325

                                    Insurance payable                                              4,200

                        D)Prepaid insurance                             3,325

                                    Insurance expense                                              3,325

Answer 1

Bland foods made following entries on August 1 , 2003 for purchase of insurance policy:
		Debit	Credit
Aug-01	Insurance A/c Dr	4200
	To Insurance payable		4200
He should have passed for following entry as he has paid insurance premium for two years
		Debit	Credit
Aug-01	Prepaid insurance A/c Dr	4200
	To Insurance payable		4200
He should have expensed $ 175 ($ 4200 / 24 months) per month to income statement
So till Dec 31, 2003 he should have charged to income and statement $ 875 ($ 175 x 5 months)
So Bland foods should transferred $ 3325 ($ 4200 - $ 875) to prepaid insurance
Adjusting entry as on 31 December will be
		Debit	Credit
Aug-01	Prepaid insurance A/c Dr	3325
	Insurance expense A/c		3325