Bailey Co. changed the accounting for insurance expense from the cash basis to the accrual basis in the current year. In January of the prior year, Bailey recorded insurance expense of $240,000 for the cash purchase of a four-year insurance policy. How should Bailey report the insurance transaction in the current year’s financial statements?

  1. As a $180,000 debit to prepaid insurance.
  2. As a $60,000 debit to insurance expense.
  3. As a $60,000 debit to insurance expense, a $120,000 debit to prepaid asset, and $180,000 credit to retained earnings.
  4. As a $180,000 debit to insurance expense, a $120,000 credit to prepaid asset, and $60,000 credit to retained earnings.

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