Samson and Sons purchased a 6-month insurance policy for $1,200 which covers the months July through December. Initially the entire cost of the insurance policy was recorded in prepaid insurance. What is the adjusting journal entry required at the end of July?

a. Debit prepaid insurance $1,200; Credit cash $1,200.

b. Debit insurance expense $1,200; Credit prepaid insurance $1,200.

c. Debit prepaid insurance $200; Credit insurance expense $200.

d. Debit insurance expense $200; Credit prepaid insurance $200.

The answer is D.

Explanation:

To increase asset and expense, you debit while credit decreases it.

To increase, liabity, revenue (income), equity, you credit while debit decreases it.

An insurance that has been prepaid is an asset because the benefit has not been fully utilised.

Samson and Sons has paid for an insurance that will expire December at the beginning of July.

$1,200 for 6 months.

Samson and Sons needs to recognize this as the service is being enjoyed monthly.

Therefore, insurance expense every month will increase by $1,200/6

$200

Remember that expense increase by debit and asset (Prepaid Insurance) decrease by credit.

So we have:

Debit insurance expense $200; Credit prepaid insurance $200