Asked by Jeremy Quinonez on May 01, 2024
Verified
Smokey Company purchases a one-year insurance policy on July 1 for $3,600. The adjusting entry on December 31 is
A) debit Insurance Expense, $1,800; credit Prepaid Insurance, $1,800
B) debit Insurance Expense, $1,500; credit Prepaid Insurance, $1,500
C) debit Insurance Expense, $2,100; credit Prepaid Insurance, $2,100
D) debit Prepaid Insurance, $1,800; credit Cash, $1,800
Insurance Policy
A contract between an insurer and policyholder specifying the terms for the payment of claims to the insured or their beneficiaries in the event of a covered loss.
Adjusting Entry
A journal entry made at the end of an accounting period to allocate income and expenditures to the appropriate accounting period.
Debit
An accounting entry that results in either an increase in assets or a decrease in liabilities or equity on a company's balance sheet.
- Acknowledge the link between prepaid expenses, accrued expenses, and their corresponding adjustments.
Verified Answer
AF
Abbigail FriesMay 03, 2024
Final Answer :
A
Explanation :
Since Smokey Company purchases a one-year insurance policy on July 1, only half of the policy period would have elapsed by December 31. Therefore, the amount of insurance actually used during the six months ending December 31 is only $1,800 ($3,600/2). The adjusting entry to record this would involve debiting Insurance Expense (to recognize the cost of the insurance for the period) and crediting Prepaid Insurance (to reduce the amount of the asset to its ending balance, which represents the insurance cost that has not yet been used). Therefore, choice A is the best answer.
Learning Objectives
- Acknowledge the link between prepaid expenses, accrued expenses, and their corresponding adjustments.