On October 1, 2007, a 1-year insurance policy
for the building was paid with $12,000 on
premium and was recorded as Prepaid
Insurance. On December 31, 2007, what
adjusting entry is needed?
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Given:
The Paid amount for the building = $12,000 as on Oct 1
To find:
Adjusting entry
Solution:
The adjusting entry is as follows
Insurance expense Dr $3,000 ($12,000 × 3 months ÷ 12 months)
To Prepaid insurance $3,000
(Being the insurance expense is recorded)
For recording this we debited the insurance expense as it increased the expense and credited the prepaid insurance as it decreased the assets
Therefore we considered the three months from Oct 1 to Dec 31
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