Answer:
Debit Insurance expense $8,000
Credit Prepaid insurance $8,000
Explanation:
The company uses asset method of recording the purchase of insurance. Hence, at end of year end the company must recognize the expire portion of the policy and charge it against insurance expense.
$12,000 / 6 months = $2,000 (monthly insurance expense)
$2,000 x 4 months (September 1 to December 31) = $8,000
Entry:
Debit Insurance expense $8,000
Credit Prepaid insurance $8,000
The balance of the prepaid insurance at the end of first year is $4,000 (12,000 - 8,000).
