On May 1, 2018, ABC Company purchased a three-year insurance policy for $5,400.

Question

On May 1, 2018, ABC Company purchased a three-year insurance policy for $5,400. Indicate if each of the tollowing statements is true or false by clicking in the drop down box to the right of each statement. Be careful with matching questions because carmen randomizes the matches. Thus, If you print out the quiz to work on it and then enter your answers later in the week, it is very likely the order of the matches will be different. Therefore, exercise caution when entering your answers into carmen. Quiz scores will not be adjusted for errors in entering choices ABC Company will report insurance expense of $1,800 in its 2019 income statement [Choose ] ABC Company wil report prepaid insurance Choose ) of $1,200 in its December 31, 2018 balance sheet The adjusting entry made by ABC Company at December 31, 2018 relating to this insurance policy results in a $1,200 decrease in equity [ Choose ] Prepaid insurance is classitied as a liabilitly Choose] account

Explanation / Answer

Insurance for 3 years = $5,400
Insurance for 1 year = $5,400 / 3 = $1,800

Answer A.

ABC Company will report insurance expense of $1,800 in its 2019 income statement:

True

Annual Insurance expense is $1,800

Answer B.

False

Insurance Expense in 2018 = $1,800 * 8/12
Insurance Expense in 2018 = $1,200

Balance of Prepaid Insurance = $5,400 - $1,200
Balance of Prepaid Insurance = $4,200

Answer C.

True

Adjusting entry for insurance expense will decrease retained earnings by $1,200

Answer D.

False

Prepaid insurance is classified as a asset account.

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