Doug paid $3,000 on a one-year insurance policy on March 1. The entry included a debit to Prepaid Insurance. The adjusting entry on December 31 of Year 1 would include a:

Question

Quizplus · Accepted Answer

The correct adjusting entry is to recognize the insurance expense incurred from March 1 to December 31, which is 10 months of the 12-month policy. Therefore, $2,500 ($3,000 x 10/12) of the prepaid insurance should be recognized as an expense, requiring a debit to Insurance Expense and a credit to Prepaid Insurance for $2,500.

Doug Paid $3,000 on a One-Year Insurance Policy on March