On January 1 a company purchased a five-year insurance policy for $1,800 with coverage
starting immediately. If the purchase was recorded in the Prepaid Insurance account, and the
company records adjustment only at year-end, the adjusting entry at the end of the first year is:

Question

BlackTom AI · Accepted Answer

Prepaid insurance of $1,800 for five years implies annual insurance expense = $1,800 ÷ 5 = $360.

1) Relevant knowledge points and concepts
- Accrual accounting and the matching principle require expenses to be recognized in the period they are incurred, not necessarily when paid.
- Prepaid insurance is an asset that must be expensed over the coverage period as the insurance is "used up."
- An adjusting entry at period end moves the expired portion from Prepaid Insurance (asset) to Insurance Expense (expense).

2) Step-by-step reasoning process
- The policy term is five years beginning Jan 1; by year-end (one year later) one full year of coverage has expired.
- Determine the portion of the prepaid amount that expired during the year and record it as Insurance Expense, reducing the Prepaid Insurance asset.

3) Calculations with intermediate steps
- Total prepaid amount = $1,800
- Term in years = 5
- Annual expense = $1,800 ÷ 5
- Annual expense = $360
Thus, after one year $360 of the prepaid asset has expired and must be recorded as expense.

4) Why the correct answer is correct
- The adjusting journal entry must debit Insurance Expense for the expired portion ($360) to recognize the cost of insurance used during the year, and credit Prepaid Insurance for $360 to reduce the asset balance accordingly. This follows the matching principle and properly reports expenses and remaining assets.

5) Why other answers would be incorrect
- Debiting Insurance Expense for $1,800 (or crediting Prepaid for $1,800) would expense the entire five-year policy in one year—violates matching.
- Debiting $1,440 would incorrectly expense the remaining unexpired portion rather than the expired portion.
- Doing no adjustment would overstate assets and understate expenses for the year.

6) Conclusion
The correct adjusting entry at year-end is: debit Insurance Expense $360; credit Prepaid Insurance $360, which matches the provided answer.

On January 1 a company purchased a five-year insurance policy for $1,800 with coverage starting immediately. If the purchase was recorded in the Prepaid Insurance account, and the company records adjustment only at year-end, the adjusting entry at the end of the first year is:单项选择题

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