Paddy Co. bought a 1 year insurance on 1 October 2024 for $12000. What adjustment entry will Paddy record on 31 October 2024?

Question

BlackTom AI · Accepted Answer

Question restatement: Paddy Co. bought a 1 year insurance on 1 October 2024 for $12,000. What adjustment entry will Paddy record on 31 October 2024?

Option a: Insurance Expense $1000 Dr, Prepaid insurance $1000 Cr
- This option represents recognizing one month of insurance expense (since 12 months in a year, $12,000 / 12 = $1,000 per month) and reducing the Prepaid Insurance asset by $1,000. It aligns with the accrual accounting principle of matching expenses to the period they are incurred. The insurance coverage began on Oct 1, so by Oct 31, one month has expired and one month’s worth of the prepaid amount should be expensed. Debit Insurance Expense increases the expense, and credit Prepaid Insurance decreases the asset account accordingly.

Option b: Insurance Expense $12,000 Dr, Prepaid insurance $1,200 Cr
- This option incorrectly records the entire annual amount as an expense in one month, which overstates the expense for October and would ignore the remaining prepaid balance. The numbers do not correspond to the one-month period; it mixes the full annual cost with a fractional credit, which is inconsistent with the actual usage.

Option c: Insurance Expense $12,000 Cr, Cash 12,000 Cr
- This entry suggests expensing the full annual cost and crediting cash, but on 31 October the company has not paid cash again; the initial cash payment was on 1 October. Moreover, the event is to adjust prepaid insurance, not to record a cash outflow for the entire year.

Option d: Prepaid insurance $12,000 Dr, Cash $12,000 Cr
- This entry would reflect the original purchase (capitalizing the prepaid asset and decreasing cash). However, the date in the prompt asks for the adjustment on 31 October, not the initial acquisition. It also fails to recognize the expense incurred during October.

Summary: The correct approach is to recognize one month of insurance expense and reduce the prepaid insurance asset by the same amount, which is exactly what option a does. The other options either misstate the amount, misidentify the accounts affected, or reflect inappropriate timing for the adjustment.

FNDN Accounting 2025 STD O2

Paddy Co. bought a 1 year insurance on 1 October 2024 for $12000. What adjustment entry will Paddy record on 31 October 2024?

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