Yummy Foods purchased a two-year fire and extended coverage insurance policy on August 1, 2021, and charged the $4,440 premium to Insurance expense. At its December 31, 2021, year-end, Yummy Foods would record which of the following adjusting entries? Multiple Choice Insurance expense 925 Prepaid insurance 925 Insurance expense 925 Prepaid insurance 3,515 Insurance payable 4,440 Prepaid insurance 925 Insurance expense 925 Prepaid insurance 3,515 Insurance expense 3,515.

Correct answer is Debit Prepaid insurance 3,515, and Credit Insurance expense 3,515

Explanation:

During the acquisition date, Yummy Foods used expense method in recording the transaction, on that date they charged the whole amount to insurance expense

The $4,440 is a 24 months policy, therefore we must compute the insurance expense applicable for the year covering from August 1, 2021 1 to December 31, 2021 (5 months)

An adjusting entry to set up the Unexpired portion of the insurance must be done at the year end in the amount of $3,515 while the balance of the insurance is $925.

$4,440 / 24 months = $185 x 5 months = $925 (insurance expense)

$4,440 - $925 = $3,515 (Prepaid insurance)

Entry of it is:

Debit Prepaid insurance $3,515

Credit Insurance expense $3,515