On January 1 a company purchased a five-year insurance policy for $1,800 with coverage starting immediately. If the purchase was recorded in the Prepaid Insurance account, and the company records adjustments only at year-end, the adjusting entry at the end of the first year is:

A. Debit Prepaid Insurance, $1,800; credit Cash, $1,800.

B. Debit Prepaid Insurance, $1,440; credit Insurance Expense, $1,440.

C. Debit Prepaid Insurance, $360; credit Insurance Expense, $360.

D. Debit Insurance Expense, $360; credit Prepaid Insurance, $360.

E. Debit Insurance Expense, $360; credit Prepaid Insurance, $1,440.

First you have to compute the amount of insurance expense for the year. $1,800 divided by 5 years = insurance expense per year.

Next you have to figure out what accounts to use for the adjusting entry. Hint: each adjusting entry affects one balance sheet account and one income statement account.

You will have to reduce your balance sheet account and record an expense account, which is an income statement account.