On December 31, Carmack Company's Prepaid Insurance account had a balance before adjustment of $6,000. The insurance was purchased on July 1 of the same year for one year of insurance coverage, with coverage beginning on that date. The adjusting entry needed on December 31 is:

Question

Quizplus · Accepted Answer

Since six months of insurance coverage has already expired, the remaining six months' worth of insurance (which is the amount still prepaid as of December 31) needs to be expensed. Therefore, the adjusting entry should be to debit Insurance Expense (for $3,000) and credit Prepaid Insurance (for $3,000).

On December 31, Carmack Company's Prepaid Insurance Account Had a Balance