The balance in the prepaid insurance account before adjustment at the end of the year is $4,800, which represents the insurance premiums for four months. The premiums were paid on November 1. The adjusting entry required on December 31 is:
A) Debit Insurance Expense, $2,400; credit Prepaid Insurance, $2,400.
B) Debit Prepaid Insurance, $2,400; credit Insurance Expense, $2,400.
C) Debit Insurance Expense, $1,200; credit Prepaid Insurance, $1,200.
D) Debit Prepaid Insurance, $1,200; credit Insurance Expense, $1,200.
E) Debit Cash, $4,800; Credit Prepaid Insurance, $4,800.

Question

Quizplus · Accepted Answer

The adjusting entry required on December 31 is to debit Insurance Expense for $2,400 and credit Prepaid Insurance for $2,400. This is because the balance in the prepaid insurance account represents the insurance premiums for four months, and two months have passed since the premiums were paid. Therefore, the insurance expense for the two months that have passed needs to be recognized.

The Balance in the Prepaid Insurance Account Before Adjustment at the End