Which adjusting entry would involve the allocation of a prepaid insurance expense?

The allocation of a prepaid insurance expense is typically handled through a deferral entry that spreads the insurance premium expense over the periods to which it applies. When a company pays for insurance in advance, that cost is initially recorded as a prepaid expense on the balance sheet. As time passes and the insurance coverage is used, an adjusting entry is made to recognize the expense, effectively moving the cost from the prepaid account to the expense account.

This method matches the insurance expense with the periods it benefits, aligning with the accrual basis of accounting, which aims for expenses to be recognized in the same period as the revenues they help to generate. Thus, the correct approach for handling prepaid insurance is to recognize it gradually as an expense throughout the coverage period, demonstrating proper expense recognition practices in financial reporting.