On January 1,2011 the balance in the prepaid insurance account was $2,500.On December 31,2011,after the 2011 adjusting entries were made,the balance of the prepaid insurance account was $1,200.During 2011,cash payments for insurance premiums amounted to $5,000,which was debited to the prepaid insurance account.Prepare the adjusting entry which must have been made at December 31,2011.

Question

Quizplus · Accepted Answer

Here's the information we have:
1. Prepaid insurance balance on January 1, 2011: $2,500
2. Prepaid insurance balance on December 31, 2011: $1,200
3. Cash payments for insurance premiums during 2011: $5,000
The total amount available for insurance coverage during the year is the sum of the initial prepaid insurance balance and the cash payments made during the year:
Total available for insurance = Initial prepaid insurance + Cash payments
Total available for insurance = $2,500 + $5,000
Total available for insurance = $7,500
At the end of the year, the remaining balance in the prepaid insurance account is $1,200. This amount represents the insurance that has been paid for but not yet expired as of December 31, 2011, and will be used in the following year(s).
To find the insurance expense for the year, we subtract the remaining prepaid insurance balance from the total available for insurance:
Insurance expense for the year = Total available for insurance - Remaining prepaid insurance
Insurance expense for the year = $7,500 - $1,200
Insurance expense for the year = $6,300
The adjusting entry to record the insurance expense for the year and to adjust the prepaid insurance balance would be:
Date: December 31, 2011
Account Debit Credit
Insurance Expense $6,300
   Prepaid Insurance $6,300
 The Insurance Expense account is debited for $6,300 to recognize the insurance cost incurred during the year. The Prepaid Insurance account is credited for the same amount to reduce its balance to the correct amount of $1,200, which represents the prepaid insurance that will be expensed in the future.

On January 1,2011 the Balance in the Prepaid Insurance Account