Adjusting Entry for Prepaid Insurance at the End of the Year
What adjusting entry is required for the Prepaid Insurance account at the end of the year?
A. debit Prepaid Insurance, $720; credit Insurance Expense, $720.
B. debit Insurance Expense, $60; credit Insurance Payable, $60.
C. debit Insurance Expense, $60; credit Prepaid Insurance, $60.
D. debit Prepaid Insurance, $60; credit Insurance Expense, $60.
E. debit Insurance Expense, $660; credit Prepaid Insurance, $660.
Answer:
The correct adjusting entry required for the Prepaid Insurance account at the end of the year is: C. debit Insurance Expense, $60; credit Prepaid Insurance, $60.
At the end of the fiscal year, we need to adjust for the month's usage of the prepaid insurance. The monthly amount is $60 (720/12). The correct adjusting entry is to debit Insurance Expense for $60 and credit Prepaid Insurance for $60.
The balance in the Prepaid Insurance account before adjustment at the end of the year is $720, representing twelve months' insurance purchased on December 1. Since the fiscal year ends on December 31, only one month's insurance will have been used, which needs to be adjusted for.
By dividing the twelve months' insurance amount by 12, we get $60 (720/12) as the insurance expense for one month. Therefore, the adjusting entry should debit (increase) the Insurance Expense account and credit (decrease) the Prepaid Insurance account by $60 to reflect that $60 of the prepaid insurance has been used in December.
The remaining $660 from the prepaid insurance is still a prepayment for future use, and the correct entry ensures proper accounting treatment for the insurance expenses incurred during the period.