On 1 October 2018 Tanya's Pools paid $2400 for a 12 month insurance premium. The $2400 was initially recorded in the insurance expense account. The adjusting entry required to accurately represent the expired insurance at 31 December 2018, the close of the annual accounting period, is:
A) DR Prepaid insurance $1800; CR Insurance expense $1800
B) DR Prepaid insurance $600; CR Insurance expense $600
C) DR Prepaid insurance $1200; CR Insurance expense $1200
D) DR Insurance expense $200; CR Prepaid insurance $200

Question

Quizplus · Accepted Answer

The correct adjusting entry is to debit Prepaid Insurance and credit Insurance Expense for $1800. This is because, by 31 December 2018, 3 months of the insurance have expired ($2400 / 12 months * 3 months = $600), leaving 9 months unexpired. The prepaid insurance account should reflect the value of the unexpired insurance, which is $1800 ($2400 - $600). This adjustment correctly represents the expense for the period and the remaining prepaid amount.

On 1 October 2018 Tanya's Pools Paid $2400 for a 12