On July 1,20A,Childe Company paid the premium in advance of $2,400 for a two-year fire insurance policy on machinery.At that time,the full amount paid was recorded as prepaid insurance.On December 31,20A,the end of the accounting year,the required adjusting entry should include which of the following?

Question

Quizplus · Accepted Answer

At the end of the accounting year, half of the insurance premium has been used up or expired (6 months out of 24 months). Therefore, the adjusting entry should decrease Prepaid Insurance (an asset) and increase Insurance Expense (an expense) by the same amount of $600 ($2,400/2). Debit entry increases the expense, so option A and D can be eliminated. Credit entry reduces the asset, so option C is also incorrect. Option B is the correct choice as it reflects the recognition of the insurance expense for the period, and the prepaid insurance balance after the adjustment is $1,800 ($2,400 - $600).

On July 1,20A,Childe Company Paid the Premium in Advance of $2,400