Question

​Smokey's Sandwich Shoppe paid​ $3,000 for a 2minusyear insurance policy on March​ 1, 2018. The accountant forgot to make any adjustments during the year. What effect would this have on the financial statements for​ 2018?

Answer 1

Answer:

insurance expense         1,250 debit

      prepaid insurance                        1,250 credit

Explanation:

the insurance contract is for 2 year so, 24 months

3,000 is the value of 24 month of insurance:

3,000 / 24 = 125 per month

From March 1st, 2018 to December 31th,2018  --> 10 months

125 x 10 = 1,250

This is the case of an accrued expense.

Our prepaid insurance will decrease by this amount and we will recognize the 1,250 insurance expense.