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

D) Prepaid insurance 3,325

Insurance expense 3,325

Explanation:

insurance cost per month = $4,200 / 24 months = $175 per month

August, September, October, November and December = 5 months = $875

$4,200 - $875 = $3,325

The correct journal entries should have been:

August 1, 2003, purchased 2 year insurance policy

Dr Prepaid insurance 4,200

    Cr Cash 4,200

December 31, 2003, accrued insurance expense

Dr Insurance expense 875

    Cr Prepaid insurance 875

But, since the purchase was incorrectly journalized as:

Dr Insurance expense 4,200

    Cr Cash 4,200

the adjusting entry must be:

Dr Prepaid insurance 3,325

    Cr insurance expense 3,325

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