Chet Company paid $52,800 for a four-year insurance policy on September 1 and recorded the $52,800 as a debit to Prepaid Insurance and a credit to Cash. What adjusting entry should Chet make on December 31, the end of the accounting period? A) Prepaid Insurance 48,400 Insurance Expense 48,400 B) Insurance Expense 13,200 Prepaid Insurance 13,200 C) Prepaid Insurance 4,400 Insurance Expense 4,400 D) Insurance Expense 4,400 Prepaid Insurance 4,400

The answer is D

Dr: Insurance expense $4,400

Cr: Prepaid Insurance $4,400

Explanation:

Prepaid insurance is an asset because the benefits has been enjoyed. The business has paid ahead. As this benefits is being enjoyed, insurance expense will increase and prepaid insurance account will decrease by the same amount.

The insurance is for four years(48months) and the total amount paid was $52,800. So what will be recognized monthly is

$52,800/48months

=$1,100

From September 1 through December 31st is four months. That means $4,400($1,100 x4) will be recognized as interest expense and prepaid insurance will also decrease by this amount too.

We have:

Dr: Insurance expense $4,400

Cr: Prepaid Insurance $4,400

The Owner’s Equity ending balance is $15,730.

Explanation: In order to calculate the ending owner’s equity you need to identify the capital, revenue and expense accounts.

The Owner’s Equity is $12,940 and withdrawals are $790.

Revenue (Fees Earned) is $9,250.

Expenses equal 2,500 + 1,960 + 775 + 250 + 185 = $5,670.

Now that we have identified the each of the three categories, we will use the owner’s equity equation.

Owner’s Equity = Capital - Drawing + Revenues - Expenses

Owner’s Equity = $12,940 - 790 + 9,250 - 5,670

Owner’s Equity = $15,730