Problem: Up In Smoke purchased a two-year fire coverage policy on August 1, Year 3, and charged the entire $4,200 premium to Insurance Expense. When preparing the December 31, Year 3 financial statements, Up In Smoke would record which of the following adjusting entries? a) Debit Insurance Expense $875; Credit Prepaid Insurance $875 b) Debit Prepaid Insurance $875; Credit Insurance Expense $875 c) Debit Insurance Expense $875; Debit Prepaid Insurance $3,325; Credit Insurance Payable $4,200 d) Debit Prepaid Insurance $3,325; Credit Insurance Expense $3,325

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Problem Details

Up In Smoke purchased a two-year fire coverage policy on August 1, Year 3, and charged the entire $4,200 premium to Insurance Expense. When preparing the December 31, Year 3 financial statements, Up In Smoke would record which of the following adjusting entries?

a) Debit Insurance Expense $875; Credit Prepaid Insurance $875
b) Debit Prepaid Insurance $875; Credit Insurance Expense $875
c) Debit Insurance Expense $875; Debit Prepaid Insurance $3,325; Credit Insurance Payable $4,200
d) Debit Prepaid Insurance $3,325; Credit Insurance Expense $3,325

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