If a company prepaid insurance of $1,200 for one year on January 1, what is the adjusting entry recorded on March 31 for one quarter used?

• A. Debit Insurance Expense 300; Credit Prepaid Insurance 300
• B. Debit Prepaid Insurance 300; Credit Insurance Expense 300
• C. Debit Insurance Expense 1,200; Credit Prepaid Insurance 1,200
• D. Debit Prepaid Insurance 1,200; Credit Insurance Expense 1,200

Answer: (B)

Prepaid items are assets that are spent over time. As you use the insurance, part of the asset becomes an expense, so the adjusting entry moves cost from the asset to Insurance Expense.

The prepaid insurance is 1,200 for 12 months, which is 100 per month. By March 31, three months have passed, so 300 is the portion used. The adjusting entry is to debit Insurance Expense for 300 and credit Prepaid Insurance for 300, recognizing the expense and reducing the asset accordingly.

So, Insurance Expense increases by 300 and Prepaid Insurance decreases by 300. Choices that would increase the asset or record the full 1,200 at this date don’t reflect the portion actually used.