Qwerty Inc. prepaid $3,600 on November 1, 2014 for a one-year insurance premium. On January 1, 2015 of the next year (after December 31 adjustments), the Prepaid Insurance account will have a debit balance of:
A)$3,300.
B)$3,900.
C)$3,600.
D)$3,000.

Question

Quizplus · Accepted Answer

Prepaid Insurance is an asset account, and it is increased by debits and decreased by credits. A $3,600 payment was made on November 1, 2014, which was for insurance coverage for one year. Because the insurance coverage is for a year, the full amount of $3,600 is considered a prepaid expense. As of December 31, 2014, two months have passed since the payment, so the amount of insurance that has been used up is $3,600/12 months x 2 months = $600. Therefore, the balance in Prepaid Insurance on December 31, 2014, is $3,600 - $600 = $3,000. Because this account has a debit balance of $3,000 as of December 31, 2014, the answer is D.