Question

For each separate case below, follow the 3-step process for adjusting the prepaid asset account at December 31. Step 1: Determine what the current account balance equals. Step 2: Determine what the current account balance should equal. Step 3: Record the December 31 adjusting entry to get from step 1 to step 2. Assume no other adjusting entries are made during the year. a. Prepaid Insurance. The Prepaid Insurance account has a $4,700 debit balance to start the year. A re- view of insurance policies and payments shows that $900 of unexpired insurance remains at year-end. b. Prepaid Insurance. The Prepaid Insurance account has a $5,890 debit balance at the start of the year. A review of insurance policies and payments shows $1,040 of insurance has expired by year-end. C.PrepaidRent.OnSeptember1ofthecurrentyear,thecompanyprepaid$24,000 for 2 years of rentfor facilities being occupied that day. The company debited Prepaid Rent and credited Cash for $24,000.

Answer 1

PART A

Answer:

Insurance expense debit for 3,800

        Insurance prepaid credit for 3,800

Explanation:

a.- Prepaid Insurance. The Prepaid Insurance account has a $4,700 debit balance to start the year. A re- view of insurance policies and payments shows that $900 of unexpired insurance remains at year-end.

Step 1:  Currently equals to $4,700

Step 2: It should equal $900

In this Case: It is giving us the begining balance, and then it proceeds to tell us the ammount unexpired, which means the ending balance. So the diference will be the adjuting entry

Step 3: $4700 - $900 = $3,800

insurance expense debit for 3,800

  insurance prepaid credit for 3,800

PART B

Answer:

insurance expense 1040  debit

        prepaid insurance               1040credit

Explanation:

b.- Prepaid Insurance. The Prepaid Insurance account has a $5,890 debit balance at the start of the year. A review of insurance policies and payments shows $1,040 of insurance has expired by year-end.

Step 1: Curently equals to $5,890

Step 2: 5,890 - 1,040 expired portion = 4,850 unexpired portion

            The blaance should be 4,850

In this Case: It is giving us the begining balance, and then it proceeds to tell us the ammount expired, which means the adjusting entry. So the diference will be the ending balance

Step 3

The adjusting entry must be made for 1,040 which is the expired portion

insurance expense 1040  debit

       prepaid insurance               1040credit

PART C

Answer:

rent expense   4,000 debit

        prepaid rent                4,000 credit

Explanation:

C.- PrepaidRent. On September 1 of the current year, the company prepaid $24,000 for 2 years of rent for facilities being occupied that day. The company debited Prepaid Rent and credited Cash for $24,000.

Step 1 Current balance is 24,000

In this Case: It is giving us the begining balance, and then it proceeds to tell us information about the contract, which means we are going to work to get the expired portion and with that calculate the ending balance like on part B

Step 2 We are at December 31th the expired portion will be 4 months (September, October, November and December) so:

        24,000

-----------------------------   x 4 months expired = 4,000 expired portion

24 month of contract

24,000 - 4,000 = 20,000

begining - expired = ending AKA "unexpired"

The balance should be equal to 20,000

Step 3: the adjusting entry should be done for 4,000 which is the expired portion of the rent.

rent expense   4,000 debit

   prepaid rent                4,000 credit