Harrod Company paid $6,200 for a 4-month insurance premium in advance on November 1, with coverage beginning on that date. The balance in the prepaid insurance account before adjustment at the end of the year is $6,200, and no adjustments had been made previously. The adjusting entry required on December 31 is:Debit Prepaid Insurance, $2,400; credit Insurance Expense, $2,400.
(a) Debit Cash, $4,800; Credit Prepaid Insurance, $4,800.
(b) Debit Insurance Expense, $1,200; credit Prepaid Insurance, $1,200.
(c) Debit Prepaid Insurance, $1,200; credit Insurance Expense, $1,200.
(d) Debit Insurance Expense, $2,400; credit Prepaid Insurance, $2,400.

The answer is (d) Debit Insurance Expense, $2,400; credit Prepaid Insurance, $2,400.

Explanation: Please note that the insurance premium paid should be $4,800 and not $6,200, as was provided in the question.

Prepayment is an advance payment for services not yet enjoyed. When the prepaid insurance premium was made, the following entries were raised: Debit Prepaid insurance premium $4,800; Credit Cash $4,800. It is then amortize to expense (income statement) based on the tenor.

Since Harrod Company paid for 4-month insurance premium, the monthly amortization would be $1,200 per month ($4,800 divided by 4 months). Then, note that November and December amortization charges have not been accounted for, therefore we have 2 months amortization pending ($1,200 * 2 months = $2,400), which were appropriately adjusted for as above.

December 31, accrued insurance expense

Dr Insurance expense 3,100

    Cr Prepaid insurance 3,1000

Explanation:

the initial journal entry to record this transaction was:

November 1, purchase of 4 month insurance policy

Dr Prepaid insurance 6,200

    Cr Cash 6,200

Since this company uses the accrual method of accounting, it must record expenses and revenues in the periods that they occur, not when they are paid or collected. In this case, only 2 months worth of insurance was accrued = ($6,200 / 4 months) x 2 months = $3,100.

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