A 12-month insurance policy was purchased on Dec. 1 for $3,600 and the Prepaid insurance account was increased for the payment. 14 - Demonstrate the required adjusting journal entry on Dec. 31 by selecting from the choices below.

a. Prepaid insurance would be credited for $3,600.

b. Cash would be credited for $3,600.

c. Insurance expense would be debited for $300.

d. Insurance expense would be debited for $3,600.

The correct answer is C

Explanation:

The insurance policy was purchased on Dec 1 worth $3,600, so on Dec 31, the entry to be recorded is as follows:

Insurance expense A/c ... Dr $300

Prepaid insurance A/c ... Cr $300

When the asset is charged on to the expense account then the expense account of the insurance is debited against the account of the prepaid insurance.

Working Note:

Amount = Insurance amount / Number of months

= $3,600 / 12

=$300