On November 1, 2007, Pilot Company paid $1200 in advance for an insurance policy that covered the company for six months. Assuming that Pilot recorded this purchase as an asset, the adjusting entry required on December 31, 2007 would include: a) a debit to Prepaid Insurance for $1200 b) a credit to Prepaid Insurance for $1200 c) a credit to Insurance Expense for $400 d) a debit to Insurance Expense for $400
My thought is that the answer would be c) a credit to Insurance Expense for $400 since only two months have been used. The credit would take away from the asset that was debited earlier. Is my thinking correct? If not can you please explain?