On January 1, Fey Properties paid $12,600 for a three-year insurance premium, with coverage beginning immediately. Fey Company prepares monthly financial statements.
Which of the following describes the required adjusting entry on January 31?
A) Debit Cash for $4,200 and Credit Prepaid insurance for $4,200
B) Debit Prepaid insurance for $350 and Credit Insurance expense for $350
C) Debit Insurance expense for $350 and Credit Prepaid insurance for $350
D) Debit Cash for $8,400 and Credit Prepaid insurance for $8,400
E) Debit Insurance expense for $4,200 and Credit Prepaid insurance for $4,200

Question

Quizplus · Accepted Answer

The total premium for three years is $12,600, which for one month amounts to $12,600 / 36 months = $350. The adjusting entry on January 31 should recognize one month of insurance expense, thus debiting Insurance Expense and crediting Prepaid Insurance for $350.

On January 1, Fey Properties Paid $12,600 for a Three-Year