Smokey Company purchases a one-year insurance policy on July 1 for $3,600. The adjusting entry on December 31 is

Question

Quizplus · Accepted Answer

Since Smokey Company purchases a one-year insurance policy on July 1, only half of the policy period would have elapsed by December 31. Therefore, the amount of insurance actually used during the six months ending December 31 is only $1,800 ($3,600/2). The adjusting entry to record this would involve debiting Insurance Expense (to recognize the cost of the insurance for the period) and crediting Prepaid Insurance (to reduce the amount of the asset to its ending balance, which represents the insurance cost that has not yet been used). Therefore, choice A is the best answer.

Smokey Company Purchases a One-Year Insurance Policy on July 1