Assume that on September 1, Year 1, a six-month property insurance premium of $12,000 was paid for a policy whose coverage began on that day. Assume also that the Prepaid Insurance account was debited for $12,000 at this time. The December 31, Year 1, adjustment with respect to the this policy will include a:

Debit Insurance expense $8,000

Credit Prepaid insurance $8,000

Explanation:

The company uses asset method of recording the purchase of insurance. Hence, at end of year end the company must recognize the expire portion of the policy and charge it against insurance expense.

$12,000 / 6 months = $2,000 (monthly insurance expense)

$2,000 x 4 months (September 1 to December 31) = $8,000

Entry:

Debit Insurance expense $8,000

Credit Prepaid insurance $8,000

The balance of the prepaid insurance at the end of first year is $4,000 (12,000 - 8,000).

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