Question

"on may 1, mesa verde, inc. purchased a 2-year insurance policy for $15,600. prepaid insurance was debited for the entire amount. on december 31, when the annual financial statements are prepared, the appropriate adjusting journal entry would be a"

Answer 1

The journal entry on May 1 was:

A debit to Prepaid Insurance for 15,600

And a credit to cash for 15,600

 

Prepaid Insurance is the share of an insurance premium that has been paid in early and has not finished as of the balance sheet date.

The monthly insurance payment for two years is computed by 15,600/24 months which is $650 per month.

 

At December 31 the adjusting entry would be:

A debit to Insurance Expense 5,200

And a credit to Prepaid Insurance for 5,200

 

5,200 is computed by:

650 x 8 months (starting from May 1 to December 31) = 5,200