On August 31st, 2014, a four-year insurance policy was purchased with a cash payment of $60,000. Coverage began immediately. 37. What is the amount of insurance expense that would be reported on the income statement for the year ended December 31, 2014

$5,000

Explanation:

The journal entry to record the purchase of the 4 year insurance policy should be:

August 31st, 2014, purchase of insurance policy

Dr Prepaid insurance 60,000

    Cr Cash 60,000

Both prepaid insurance and cash are both asset accounts.

By December 31st, the journal entry to record insurance expense should be as follows:

December 31st, 2014, adjustment entry for 4 months of insurance expense

Dr Insurance expense 5,000

    Cr Prepaid insurance 5,000

insurance expense = ($60,000 / 4 years) x 4/12 = 5,000

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