On November 1, 2015, the Morrison Company purchased a two-year umbrella insurance policy for $3,600 and recorded the transaction by debiting Prepaid Insurance and crediting Cash. Which of the following adjusting entries would be used by Morrison to properly account for prepaid insurance on December 31, 2015?

Question

Quizplus · Accepted Answer

As of December 31, 2015, Morrison Company has used up two months of the two-year policy, which is equal to 2/24 or 1/12 of the total value of the policy. Therefore, the proper adjusting entry to recognize the expired insurance would be to debit the Insurance Expense account and credit the Prepaid Insurance account for the amount of one month's coverage, which is $300 ($3,600 divided by 12). So, the correct choice is A. Option B is incorrect because it would reverse the initial entry, resulting in the expense being under-recognized or ignored altogether. Option C is incorrect because accumulated amortization is not relevant in this context. Option D is incorrect because it would assume that half of the policy has expired, which is not the case.

On November 1, 2015, the Morrison Company Purchased a Two-Year