Fischer Consulting paid $18,000 on December 1, 2010 for a three-year insurance policy (December 1, 2010 to November 30, 2013) and recorded the entire amount as prepaid insurance.The December 31, 2010 adjustment should be recorded as follows:
A)debit prepaid insurance and credit insurance expense $500.
B)debit insurance expense and credit prepaid insurance $500.
C)debit insurance expense and credit prepaid insurance $17,500.
D)debit prepaid insurance and credit insurance expense $17,500.

Question

Quizplus · Accepted Answer

The adjustment at the end of the year should reflect the portion of the prepaid insurance that has been used up during the year. Since the policy is for three years and only one month (December) has passed, the amount used up is 1/36 (1 month out of 36 months) of the total prepaid insurance. Therefore, the adjustment should be to debit insurance expense (to recognize the expense for the year) and credit prepaid insurance (to reduce the amount of prepaid insurance) for $500 (1/36 of $18,000).

Fischer Consulting Paid $18,000 on December 1, 2010 for a Three-Year