If $1,800 was paid for a one-year insurance policy, the adjustment to insurance expense at the end of the first month would be a:

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BlackTom AI · Accepted Answer

In this scenario, we prepaid 1800 for a one-year insurance policy, which means the prepayment is initially recorded as an asset (Prepaid Insurance). As time passes, the appropriate accounting treatment is to recognize the portion that has expired as an expense (Insurance Expense) and reduce the asset accordingly. Since one year has 12 months, the monthly amortization is 1800 / 12 = 150.

Option A: 'debit for $150' — This aligns with the typical adjusting entry to recognize one month of insurance expense: Debit Insurance Expense 150 and Credit Prepaid Insurance 150. This option reflects the correct direction and amount for the adjustment.

Option B: 'debit for $100' — This would imply only 100 of the prepaid amount is expensed in the first month, which does not match the calculated monthly amortization of 150 from the 1800 annual prepaid. It understates the expense.

Option C: 'credit for $150' — A credit of 150 would decrease the Insurance Expense account or increase a liability, neither of which matches the intended adjustment. The expense should be increased (debited), not decreased, for the month.

Option D: 'credit for $100' — This incorrectly uses both the amount (100) and the credit direction, which would neither properly reflect the expense recognition nor the reduction of the prepaid asset by the correct monthly amount.

Putting it together, the adjustment requires increasing the expense and decreasing the prepaid asset by 150, which is implemented through a debit to Insurance Expense for 150 and a corresponding credit to Prepaid Insurance for 150. The options that misstate the amount or the direction of the entry fail to reflect the correct accounting treatment for this prepaid expense scenario.

BBK99E1 - Basic Bookkeeping Level 1 Part 2 - Online Exam

If $1,800 was paid for a one-year insurance policy, the adjustment to insurance expense at the end of the first month would be a:

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