On December 1, 2017, Flynn Consulting paid $27,000 for a three-year insurance policy (December 1, 2017 to November 30, 2020)and debited the entire amount to Prepaid Insurance.The December 31, 2017 required adjusting entry in connection with this policy would be

Question

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The adjusting entry for prepaid insurance is made at the end of the accounting period to recognize the portion of the prepaid insurance that has expired or been used up. In this case, the insurance policy covers three years, so the portion that has expired at the end of the first year (December 31, 2017) is one-third of the total ($27,000/3 = $9,000).

To adjust for this, we need to reduce the balance in Prepaid Insurance (a balance sheet account) and recognize an expense for the amount that has expired (an income statement account). The adjusting entry is:

Debit Insurance Expense $9,000
Credit Prepaid Insurance $9,000

Option B correctly represents this entry, debiting Insurance Expense (recognizing the expense) and crediting Prepaid Insurance (reducing the asset account). Option A and D are incorrect because they do not recognize the amount that has expired correctly. Option C is incorrect because it credits Insurance Expense instead of debiting it, which would decrease expenses and result in an incorrect net income.

On December 1, 2017, Flynn Consulting Paid $27,000 for a Three-Year