Answered Essay: CAN I GET AN EXPLANATION OF THE ANSWER? THANKS

CAN I GET AN EXPLANATION OF THE ANSWER? THANKS

on March 31,2004, the tricot company purchased a two-year fire insurance policy. Tricot recorded the purchase by debiting Prepaid Insurance and crediting Cash for $12,000. Which of the following adjusting entries should Tricot use at the end of 2004 to match insurance expense against revenues.

A. prepaid insurance 4,500 insurance expense 4,500

b. insurance expense 4,500 prepaid insurance 4,500  

c. prepaid insurance 7500 insurance expense 7500

d. Insurance expense 7500 prepaid insurance 7500

Expert Answer

 

b. insurance expense 4,500 prepaid insurance 4,500

Total cash paid for insurance a $ 12,000.00
Total time covered by this insurance b 24 Months
per month Insurance expired c=a/b $       500.00
Insurance period expired in 2004 d 9 Months (Fom April 1 to December 31)
Insurance expired in 2004 c*d $   4,500.00
Thus, adjsuting entry at year end
Accounts Debit Credit
Insurance expenses $ 4,500.00
Prepaid Insurance $ 4,500.00
(To record insurance epenses for 2004)

Amount paid for insurance expenses is for 2 years or 24 months.Such insurance expenses are recognised proportionately.In 2004 It covers 9 months.So, for 9 months insurance expenses are recognised in 2004.

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