Final answer:
Cacky's Bakery would record an adjusting entry debiting Insurance Expense and crediting Prepaid Insurance for $5,000 to reflect five months' worth of insurance coverage from their one-year policy.
Step-by-step explanation:
On August 1, Cacky's Bakery purchased a one-year hazard insurance policy for $12,000 which was recorded as prepaid insurance. With no adjusting entries made, by the December 31 year-end, Cacky's Bakery would need to account for five months of insurance expense. The adjusting entry would therefore debit Insurance Expense and credit Prepaid Insurance for the amount of insurance used from August 1 to December 31.
To calculate the expense, take the $12,000 annual premium and divide it by 12 months to find the monthly expense of $1,000. Since five months have passed from August to December, the total expense is $1,000 multiplied by 5, which equals $5,000.
The adjusting entry on December 31 would be a debit to Insurance Expense for $5,000 and a credit to Prepaid Insurance for $5,000, reflecting the expense of the insurance that has been incurred over the five-month period.