X Company prepares annual financial statements. On July 1, 2015, X Company paid

Question

X Company prepares annual financial statements. On July 1, 2015, X Company paid $20,000 in advance for a two-year insurance policy. After the adjusting entry on December 31, 2015, what will the financial statements show?

Prepaid Insurance, $20,000;   Insurance expense, $0
Prepaid Insurance, $5,000;   Insurance expense, $15,000
Prepaid Insurance, $15,000;   Insurance expense, $5,000
Prepaid Insurance, $0;   Insurance expense, $20,000
Prepaid Insurance, $17,500;   Insurance expense, $2,500
Prepaid Insurance, $2,500;   Insurance expense, $17,500

Explanation / Answer

X Company Details Amt $ Prepaid Insurance Amt                 20,000 Duration in months                        24 Amortization per month = $           833.33 Prepaid Expense for 6 months in 2015=833.33*6=            5,000.00 So after the Dec 31. adjustment entry: Prepaid Insurance Balance =20000-5000=               15,000 Insurance Expense                  5,000 Third Option is correct.

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