Williams Company paid $24,000 for a two-year insurance policy on October 1 and recorded the $24,000 as a debit to Prepaid Insurance and a credit to Cash.
What adjusting entry should Williams make on December 31, the end of the accounting period (no previous adjustment has been made)?

Question

Quizplus · Accepted Answer

The insurance policy covers two years (24 months) at a cost of $24,000, so the monthly cost is $1,000 ($24,000 / 24 months). From October 1 to December 31 is three months, so $3,000 ($1,000 x 3 months) of the policy has been used. The adjusting entry should recognize this expense by debiting Insurance Expense and crediting Prepaid Insurance for $3,000.

Williams Company Paid $24,000 for a Two-Year Insurance Policy on October