Yummy Foods purchased a one-year hazard insurance policy on August 1 and recorded the $4,200 premium to prepaid insurance. At its December 31 year-end, Yummy Foods would record which of the following adjusting entries?

A. insurance expense 1,750 Prepaid insurance 1,750

B. prepaid insurance 1,750 insurance expense 1,750

C. insurance expense 1,750 prepaid insurance 2,450 accounts payable 4,200

D. insurance expense 2,450 prepaid insurance 2,450 Show the work

A. insurance expense 1,750 Prepaid insurance 1,750

Explanation:

Since the payment is made for one year, therefore only insurance expense in respect of five months i. e. from August to December shall be recorded in the accounts of the Yummy foods as at December 31. The remaining expense of seven months shall be recorded in the next year.

The following adjusting entry shall be recognised in respect of insurance expense in the accounts of Yummy Foods.

Debit Credit

Insurance expense $1,750

(4,200*5/12)

Prepaid insurance $1,750

So based on the above discussion, the answer shall be A. insurance expense 1,750 Prepaid insurance 1,750