Coffee Co. has a $3,600 balance in Prepaid Insurance that represents the premium paid in advance for a six-month liability insurance policy. Assuming that 4 months of premium is still remaining, the adjustment would be recorded in the work sheet as a:

Question

Quizplus · Accepted Answer

The correct adjustment is to credit Prepaid Insurance for $1,200, which represents the amount of the insurance premium that has been used up (2 months out of 6, with $3,600 total for 6 months, so $600 per month). This reduces the Prepaid Insurance account and recognizes the expense over the period it applies to.

Coffee Co Has a $3,600 Balance in Prepaid Insurance That Represents