Question

Gizmo Inc. purchased a one-year insurance policy on October 1 for $2,880. The adjusting entry on December 31 would be: (If an amount box does not require an entry, leave it blank.)

a. Debit Insurance Expense
b. Credit Prepaid Insurance
c. Credit Insurance Expense
d. Debit Prepaid Insurance

Answer 1

The adjusting entry on December 31 for the purchased insurance policy would be credit insurance expense and debit prepaid insurance.

Step-by-step explanation:

The adjusting entry on December 31 for the purchased insurance policy would be c. Credit Insurance Expense and Debit Prepaid Insurance.

The Credit Insurance Expense entry is made to recognize and allocate the portion of the insurance cost that has been used up during the accounting period (October 1 to December 31) and should be expensed.

The Debit Prepaid Insurance entry is made to reduce the prepaid insurance asset on the balance sheet since a portion of the insurance policy has now been consumed.