On December 1, 2020, Flynn Consulting paid $ 27,000 for a three-year insurance policy (December 1, 2020 to November 30, 2023) and debited the entire amount to Prepaid Insurance. The December 31, 2020, required adjusting entry in connection with this policy would be
A) debit Prepaid Insurance and credit Insurance Expense $ 750.
B) debit Insurance Expense and credit Prepaid Insurance $ 750.
C) debit Insurance Expense and credit Prepaid Insurance $ 26,250.
D) debit Prepaid Insurance and credit Insurance Expense $ 26,250.

Question

Quizplus · Accepted Answer

The adjusting entry is required to transfer a portion of the prepaid insurance amount to Insurance Expense for the period that has already passed (December 1, 2020 to December 31, 2020). Since the insurance policy is for three years, the yearly expense would be $9,000 ($27,000/3 years). Therefore, the expense for one month (December 2020) would be $750 ($9,000/12 months). To reduce the prepaid insurance balance and record the expense, the accounting entry should be to debit Insurance Expense and credit Prepaid Insurance for $750. So, the correct option is B.

On December 1, 2020, Flynn Consulting Paid $ 27,000 for a Three-Year