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msod1273
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Posted: 07 May 2012 at 21:27 \| IP Logged

Wiley, does not give a very good expalnation for this question. Can someone please explain this question.

On November 1, 2011, Key Co. paid $3,600 to renew its insurance policy for 3 years and used an income statement account to record this transaction. At December 31, 2011, Key’s unadjusted trial balance showed a balance of $90 for prepaid insurance and $4,410 for insurance expense. What amounts should be reported for prepaid insurance and insurance expense in Key’s December 31, 2011 financial statements?

	Prepaid insurance	Insurance expense
A.	$3,300	$1,200
B.	$3,400	$1,200
C.	$3,400	$1,100
D.	$3,490	$1,010

nk1001
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Posted: 07 May 2012 at 23:33 \| IP Logged

What is the answer of this question? Is it C?

msod1273
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Posted: 08 May 2012 at 13:37 \| IP Logged

The answer is C. If possible can you please show the answer in the T-acct?

Thanks!

nk1001
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Posted: 08 May 2012 at 22:51 \| IP Logged

I am sorry but I don’t know how to draw a T-account in
this forum but I will indicate the dr. /cr. balance
throughout my response so that you can understand.

Key paid $3600 for insurance renewal using an income
statement account i.e an expense account. So he recorded
all $3600 in insurance expense in November.

At December 31st, 2011, unadjusted trial balance was like
this:
Prepaid Insurance: 90 (dr)
Insurance Expense: 4410 (dr) (this balance includes $3600
payment done in november)

To properly allocate the expenses, first of all $90 (dr)
balance from prepaid insurance should be transferred to
Insurance expense assuming the previous insurance policy
is expired and all of the premiums are expensed.

Insurance Expense 90
Prepaid Insurance 90

This would make a balance of $4500 in Insurance Expense
(4410 + 90) out of which $3600 is the payment for the 3-
year insurance policy done in November. From the balance
of $4500, $3400 should be transferred to Prepaid Expense
(since only $200 should be expensed for the month of
November and December) leaving a balance of $1100 in
Insurance Expense.

I hope this will help you.

msod1273
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Posted: 09 May 2012 at 16:21 \| IP Logged

Thanks for the great explanation!

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