In its first period of operations, Weatherford Company purchased a 12-month insurance policy costing $12,000 on July 1. The company debited an asset account for the full amount. Assuming that the company only makes adjusting entries annually, at the end of its fiscal year on October 31, the adjusting journal entry to be made is

Question

Quizplus · Accepted Answer

Since the insurance policy covers a period of 12 months, the monthly insurance expense is $1,000 ($12,000/12 months). From July 1 to October 31 (the end of the fiscal year), Weatherford Company has been using insurance for 4 months (July, August, September, and October), which amounts to $4,000 ($1,000 x 4 months). Therefore, the adjusting entry required is to debit Insurance Expense for $4,000 and credit Prepaid Insurance for $4,000 ($12,000 - $4,000 = $8,000 in remaining prepaid insurance).

In Its First Period of Operations, Weatherford Company Purchased a 12-Month