Answer:
1. Debit Insurance expense $1,575
Credit prepayment $1,575.
2. Debit Unearned income $10,000
Credit Service revenue $10,000
3. no entries are required as the balance would be recognized in the balance sheet as inventory balance
Explanation:
When an amount is paid in advance for insurance yet to be enjoyed, the entries required are debit prepayment and credit cash account. On incurring the expense, the entries to be posted are debit insurance expense, credit prepayment.
For amounts received in advance for service yet to be rendered, debit cash account and credit unearned revenue. When revenue is earned, debit unearned revenue and credit service revenue.
For supplies that are purchased, debit supplies account and credit cash or accounts payable. When supplies are used up, the amount used up is recorded as debit supplies expense and credit supplies account.
As such where Aaron Lynch Company paid $2,700 for 12 months of insurance coverage on June 1, 2019, as at purchase time, debit prepayment $2,700 and credit cash account $2,700.
As at 31 December, expense to be recorded amounts to
= 7/12 * $2,700 (1 June to 31 December is 7 months)
= $1,575
To record this,
Debit Insurance expense $1,575
Credit prepayment $1,575.
where On December 1, 2019, Aaron Lynch Company collected $40,000 for consulting services to be performed from December 1, 2019, through March 31, 2020, amount earned as revenue as at December 31 would be
= 1/4 * $40,000
= $10,000
Entries required are
Debit Unearned income $10,000
Credit Service revenue $10,000
Finally, where a count of supplies on December 31, 2019, indicates that supplies of $900 are on hand, no entries are required as the balance would be recognized in the balance sheet as inventory balance.
