A 12-month insurance policy was purchased on Dec. 1 for $4,800 and the Prepaid insurance account was initially increased for the payment. The required adjusting journal entry on December 31 includes a:

Debit Insurance expense  $400

Credit Cash account          $400

Explanation:

On purchase of a policy that is billed to run over a period, the amount paid is first capitalized by posting the following entries;

Debit Prepaid expense

Credit Cash account

The amount is subsequently expensed by

Debit Insurance expense

Credit Cash account

As such where a 12-month insurance policy was purchased on Dec. 1 for $4,800 and the Prepaid insurance account was initially increased for the payment, the monthly amortization will be

= 1/12 × $4,800

= $400

The adjusting journal entry on December 31 includes a

Debit Insurance expense  $400

Credit Cash account          $400

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