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On 1 June a business pays $1,200 for a 12-month insurance policy and records it as Prepaid Insurance. What adjusting entry is required at 30 June?
ADebit Insurance Expense $1,200; credit Prepaid Insurance $1,200
BDebit Prepaid Insurance $100; credit Insurance Expense $100
CDebit Insurance Expense $100; credit Prepaid Insurance $100
DDebit Insurance Expense $1,100; credit Prepaid Insurance $1,100
Answer & Solution
Correct answer: C. Debit Insurance Expense $100; credit Prepaid Insurance $100
1. One month of a 12-month policy has expired: $1{,}200 \div 12 = 100$.
2. The expired part is an expense (debit Insurance Expense $\$100$); the asset falls (credit Prepaid Insurance $\$100$).
3. Hence C is correct.
4. A expenses the whole policy in one month; D uses the unexpired $\$1{,}100$; B reverses the entry.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §2.3.1 "Prepaid Insurance—Deferred Expense", p.63_
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