Question

If the Prepaid Insurance account had a balance of $12,000, representing one year’s policy premium, which was paid on July 1, what entry would be needed to adjust the Prepaid Insurance account at the end of December, before preparing the financial statements?

a) Debit Prepaid Insurance for $6,000 and credit Cash for $6,000.
b) Debit Insurance Expense for $6,000 and credit Prepaid Insurance for $6,000.
c) Debit Prepaid Insurance for $12,000 and credit Insurance Expense for $12,000.
d) Debit Insurance Expense for $12,000 and credit Prepaid Insurance for $12,000.

Answer 1

The correct adjusting journal entry at the end of December for the Prepaid Insurance account with an initial balance of $12,000 is to debit Insurance Expense for $6,000 and credit Prepaid Insurance for $6,000.

Step-by-step explanation:

The student is asking about the proper adjusting entry for the Prepaid Insurance account at the end of December. Given that the initial balance was $12,000 for a one-year policy starting on July 1, the amount represents insurance expense for a 6-month period (July 1 to December 31). To adjust the account, the entry that should be made is: Debit Insurance Expense for $6,000 and credit Prepaid Insurance for $6,000.

Money flows into an insurance company primarily from premiums and investments, and the money flows out through payments to customers (claims), operating expenses, and other disbursements reflecting profits or losses.