On November 1,2016,Shumate Company paid $1,200 in advance for an insurance policy that covered the company for six months.Assuming that Schumacher recorded this purchase as an asset,the adjusting entry required on December 31,2016 would include:

Question

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The insurance policy covers six months, so each month $200 ($1,200/6) is used up. By December 31, two months have passed, so $400 should be recognized as an expense. The adjusting entry would credit Prepaid Insurance for $400 to reduce the asset and debit Insurance Expense for $400.

On November 1,2016,Shumate Company Paid $1,200 in Advance for an Insurance