On November 1, 2017, Schubert Corp. paid $1,200 in advance for an insurance policy that covered the company for six months. Assuming that Schubert recorded this purchase as an asset, the adjusting entry required on December 31, 2017 would include
A) A debit to prepaid insurance for $1,200
B) A credit to prepaid insurance for $1,200
C) A credit to insurance expense for $400
D) A debit to insurance expense for $400

Question

Quizplus · Accepted Answer

At the end of December, Schubert has used up two months of the insurance policy and still has four months to go. Therefore, $400 worth of insurance has been used up (2/6 of $1,200). This means that the asset (prepaid insurance) needs to be reduced by $400 and the expense (insurance expense) needs to be increased by $400. Therefore, the adjusting entry required would be a debit to insurance expense for $400 and a credit to prepaid insurance for $400.