The prepaid insurance account of Megaton Ltd shows a balance of $1800 (net of GST) representing a payment on 1 July 2014 of a three-year insurance premium. Which of the following is the correct adjusting entry on 31 December 2014, the close of the annual accounting period?

Question

Quizplus · Accepted Answer

The adjusting entry for prepaid insurance includes an increase in insurance expense and a decrease in prepaid insurance. As half a year has passed since the payment on 1 July 2014, the amount that has been used up or expired is half of $1800, which is $900. Therefore, the adjusting entry would be to debit insurance expense for $900 and credit prepaid insurance for $900. Option B matches this description.

The Prepaid Insurance Account of Megaton Ltd Shows a Balance