ABC Ltd. has a 30 June fiscal year end. ABC Ltd. purchased a one-year insurance
ID: 2526676 • Letter: A
Question
ABC Ltd. has a 30 June fiscal year end. ABC Ltd. purchased a one-year insurance policy of $12,000 on its office equipment on 1 February 2016. Which of the following adjusting entry would be made by ABC Ltd. on 30 June 2016:
Select one:
a. Dr Prepaid Insurance $12,000 Cr Insurance Expense $7,000 Cr Cash $5,000
b. Dr Prepaid Insurance $5,000 Cr Insurance Expense $5,000
c. Dr Insurance Expense $5,000 Cr Prepaid Insurance $5,000
d. Dr Insurance Expense $5,000 Dr Insurance Payable $7,000 Cr Prepaid Insurance $12,000
Explanation / Answer
Insurance Expense = 12,000 x 5 /12 = $5,000
The correct answer is (c)
Dr. Insurance Expense 5,000
Cr. Prepaid Insurance 5,000
When Insurance was purchased 12,000 would have to debited to Prepaid Insurance account. Now, $5,000 which is expense realting to current fiscal year is being moved from Pre-paid account to expense account.