Final answer:
The adjusting entry on December 31, 2024, for a company that prepaid $9,000 for a one-year insurance policy on May 1, 2024, would include debiting insurance expense and crediting prepaid insurance for $6,000, reflecting the cost of the insurance that has been used for eight months.
Step-by-step explanation:
On May 1, 2024, when the company paid $9,000 for a one-year insurance policy, it recorded this payment as a prepaid insurance expense, which is an asset on the balance sheet. However, by December 31, 2024, eight months of the insurance coverage have elapsed, so an adjusting entry is needed to record the insurance expense that has been incurred.
The adjusting entry should include debiting insurance expense and crediting prepaid insurance to reflect the amount of the insurance policy that has been used up through December 31. Since the policy covers 12 months, we calculate the monthly insurance cost by dividing $9,000 by 12 months, which equals $750 per month. For eight months, the expense is $750 multiplied by 8, or $6,000.
The adjusting journal entry on December 31, 2024, would be:
- Debit Insurance Expense: $6,000
- Credit Prepaid Insurance: $6,000