Samantha purchased a two-year insurance policy for $7,200. The adjusting entry for one month would include a: acredit to Cash, $300 bcredit to Insurance expense, $300 cdebit to Insurance Expense, $300 ddebit to Prepaid Insurance, $300
Question
Samantha purchased a two-year insurance policy for 300 bcredit to Insurance expense, 300 ddebit to Prepaid Insurance, $300
Solution
The correct answer is d. debit to Prepaid Insurance, $300.
Here's the step-by-step explanation:
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Samantha purchased a two-year insurance policy for 7,200.
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To find out the cost of the insurance policy for one month, you would divide the total cost by the total number of months. So, 300. This means the cost of the insurance policy for one month is $300.
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When Samantha pays for the insurance policy, the initial entry would be a debit to Prepaid Insurance (an asset account) and a credit to Cash (also an asset account) for $7,200.
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At the end of each month, Samantha would need to make an adjusting entry to account for the expense of the insurance policy for that month. This would involve debiting (decreasing) the Prepaid Insurance account by 300.
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Therefore, the adjusting entry for one month would include a debit to Prepaid Insurance, $300.
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