Assume that Denis Savard Inc. paid \$2,400 for a one-year insurance policy on December 1 and recorded the entire amount as Prepaid Insurance. What adjusting journal entry should be made on December 31 to properly account for the insurance expense for the month of December?

• A. Debit Insurance Expense \$200; Credit Prepaid Insurance \$200
• B. Debit Insurance Expense \$2,400; Credit Prepaid Insurance \$2,400
• C. Debit Prepaid Insurance \$200; Credit Insurance Expense \$200
• D. Debit Prepaid Insurance \$2,400; Credit Cash \$2,400

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of prepaid expenses. Prepaid expenses are payments made in advance for goods or services to be received in the future. In this case, the insurance policy is paid for one year in advance, and the cost is initially recorded as an asset (Prepaid Insurance).
2. Step 2: Determine the portion of the prepaid insurance that has been used up by December 31. Since the policy covers one year and was purchased on December 1, only one month of insurance has been consumed by the end of December. Divide the total cost of the policy (\$2,400) by 12 months to calculate the monthly expense: $\frac{2400}{12}$.
3. Step 3: Recognize that the consumed portion of the prepaid insurance must be recorded as an expense. This is done by debiting the Insurance Expense account for the amount used (\$200 for December).
4. Step 4: Adjust the Prepaid Insurance account to reflect the reduction in the asset. Credit the Prepaid Insurance account for the same amount (\$200) to decrease its balance, as this portion has now been used.
5. Step 5: Prepare the adjusting journal entry. The entry will be: Debit Insurance Expense \$200; Credit Prepaid Insurance \$200. This ensures that the financial statements accurately reflect the expense incurred during December and the remaining prepaid asset.