Smith Company paid $26,400 for a four-year insurance policy on September 1 and recorded the $26,400 as a debit to Prepaid Insurance and a credit to Cash.
What adjusting entry should Smith make on December 31, the end of the accounting period (no previous adjustment has been made)?
A) Prepaid Insurance 2,200
Insurance Expense 2,200
B) Insurance Expense 2,200
Prepaid Insurance 2,200
C) Prepaid Insurance 24,200
Insurance Expense 24,200
D) Insurance Expense 6,600
Prepaid Insurance 6,600
E) None of the above

Question

Quizplus · Accepted Answer

The correct adjusting entry is to debit Insurance Expense and credit Prepaid Insurance for the amount of insurance that has expired, which is $2,200 (4 months of a 48-month policy, or $26,400 / 48 months * 4 months). This recognizes the expense incurred during the period and reduces the prepaid asset accordingly.

Smith Company Paid $26,400 for a Four-Year Insurance Policy on September