X Company prepares annual financial statements. On October 1, 2015, X Company pa

Question

X Company prepares annual financial statements. On October 1, 2015, X Company paid $25,000 in advance for a two-year insurance policy. After the adjusting entry on December 31, 2015, what will the financial statements show?

A) Prepaid Insurance, $18,750;   Insurance expense, $6,250
B) Prepaid Insurance, $0;   Insurance expense, $25,000
C) Prepaid Insurance, $25,000;   Insurance expense, $0
D) Prepaid Insurance, $6,250;   Insurance expense, $18,750
E) Prepaid Insurance, $21,875;   Insurance expense, $3,125
F) Prepaid Insurance, $3,125;   Insurance expense, $21,875

Which letter's answer is correct? _______

Explanation / Answer

Insurance expense for period oct to Dec 2015 = 25000*3/24 =3125

So prepaid insurance = 25000-3125=21875

So option e is correct.

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