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3 May, 05:10

On January 1, a company purchased a five-year insurance policy for $2,500 with coverage starting immediately. If the purchase was recorded in the Prepaid Insurance account, and the company records adjustments only at year-end, the adjusting entry at the end of the first year is: Multiple Choice Debit Insurance Expense, $500; credit Prepaid Insurance, $500. Debit Prepaid Insurance, $500; credit Insurance Expense, $500. Debit Prepaid Insurance, $2,000; credit Insurance Expense, $2,000. Debit Insurance Expense, $500; credit Prepaid Insurance, $2,000. Debit Prepaid Insurance, $2,500; credit Cash, $2,500.

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  1. 3 May, 07:42
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    Debit Insurance Expense, $500; credit Prepaid Insurance, $500

    Explanation:

    Cost of insurance policy = $2,500

    Duration of policy = 5 years

    Annual amortization = $2,500/5

    = $500

    To recognize the purchase at the start of the year,

    Debit Prepaid insurance $2,500

    Credit Cash account $2,500

    To recognize amortization at the end of the year

    Debit Insurance expense $500

    Credit Prepaid insurance $500

    The right option is Debit Insurance Expense, $500; credit Prepaid Insurance, $500
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