Final Answer:
The adjusting entry for December 31 would include an increase in Insurance Expense and a decrease in Prepaid Insurance. The debit would be made to Insurance Expense, and the credit would be made to Prepaid Insurance.
Step-by-step explanation:
At the time of purchasing the insurance on June 1, Deana's paid $6,000 for one year. Since the coverage period extends over a year, the initial payment of $6,000 was recorded as Prepaid Insurance (an asset account) to represent the unexpired portion of the insurance.
For the adjusting entry on December 31, six months have passed since the insurance was purchased (from June 1 to December 31). As six months out of the total 12 months of insurance coverage have expired, the amount that has been used up or expired is $6,000 / 12 months * 6 months = $3,000.
To adjust the accounts, the $3,000 of the Prepaid Insurance (asset) needs to be reduced to reflect the amount of insurance that has been used up. This reduction is represented by a credit entry to Prepaid Insurance. On the other hand, the cost of the expired insurance ($3,000) needs to be recognized as an expense for the period. Therefore, a debit entry is made to Insurance Expense for $3,000 to match the expense with the portion of the insurance that has been used.
The adjusting entry maintains the accuracy of the financial statements by reflecting the actual portion of the insurance that has been consumed (Insurance Expense) and the remaining unexpired portion (Prepaid Insurance) at the end of the accounting period.