Question

Buzzard Bicycle specializes in custom painting and design of bicycles. December 31 is the company’s fiscal year-end. Information necessary to prepare the year-end adjusting entries appears below.
1) A three-year fire insurance policy was purchased on July 1, 2021, for $18,000. The company debited Prepaid Insurance for the entire amount.
6) Buzzard borrowed $36,000 on March 1, 2021. The principal is due to be collected in five years. Interest is receivable each March 1 at an annual rate of 10%.

Record the necessary adjusting entries on December 31, 2021. (Do not round intermediate calculations. If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field.)

If someone could explain this I'd be eternally grateful

Answer 1

Answer:

See explanation section

Explanation:

Adjusting Entries

Requirement 1

December 31   Insurance Expense      Debit      $3,000

                             Prepaid Insurance   Credit                       $3,000

Note: As the company purchased a 3-year life insurance on July 1, 2021, the insurance policy will be expired on June 30, 2024. However, the insurance expense for December 31, 2021 will be for 6 months (July 1, 2021 to December 31, 2021).

Calculation:

Prepaid Insurance (3 years policy) = $18,000, so each year insurance policy will be expired = $18,000 ÷ 3 = $6,000.

Since the insurance will be expired for 6 months in 2021, the insurance expense will be = ($6,000 × 6 months) ÷ 12 months = $3,000

Requirement 6

December 31   Interest expense       Debit          $3,000

                           Interest payable     Credit                             $3,000

Note: As the company borrowed $36,000 for five years, the interest is to be paid on March 1, 2022. Therefore the interest expense will be accrued for 10 months (March 1, 2021 to December 31, 2021).

Interest expense will be = $36,000 × 10% × (10/12) = $3,000. Whichever the maturity date to be paid the entire amount will not be affected in that case.