On August 1, 2012, Base Line Realty purchased a two-year insurance policy for $15,000. On that date, the company debited Prepaid Insurance for $15,000. The adjusting entry on December 31, 2012, would include a debit to

Question

Quizplus · Accepted Answer

The two-year insurance policy was purchased on August 1, 2012, meaning that as of December 31, 2012, the company had utilized 5 out of the 24 months of insurance coverage (i.e. 17 months remained on the policy). To adjust for this, the company would need to move $3,125 (5/24 x $15,000) of the prepaid insurance from the balance sheet (prepaid insurance) to the income statement (insurance expense) to reflect the portion of the policy that has now expired. Therefore, the adjusting entry would be a debit to insurance expense for $3,125 and a credit to prepaid insurance for $3,125.

On August 1, 2012, Base Line Realty Purchased a Two-Year