Final answer:
The adjusting entry would include a credit to Prepaid Insurance and a debit to Insurance Expense for the portion of the insurance policy that has expired as of December 31, 2010.
Step-by-step explanation:
The adjusting entry on December 31, 2010 for a company that purchased a two-year insurance policy on June 30, 2010 for $18,000 would include a credit to Prepaid Insurance and a debit to Insurance Expense. By December 31, 2010, six months of the policy have elapsed, meaning six months of the insurance has been 'used up.' The cost of the insurance used is calculated by dividing the total cost of the policy ($18,000) by the number of months in the policy term (24 months) to get the monthly expense ($750), then multiplying by the number of months that have passed (6 months), resulting in an expense of $4,500 ($750 x 6). Therefore, the adjusting entry would be a debit to Insurance Expense for $4,500 and a corresponding credit to Prepaid Insurance for $4,500 to reflect the expired portion of the policy that has been used.