Question

On July 1, Crowe Co. pays $15,000 to Zubin Insurance Co. for a 3-year insurance policy. Both companies have fiscal years ending December 31. For Crowe Co.,
a. JJournalize the entry on July 1 and adjusting entry on December 31.
b. Using the above data, journalize the entry on July 1, and the adjusting entry on December 31 for Zubin Insurance Co. Zubin uses the accounts Unearned Service Revenue and Service Revenue.

Answer 1

Answer:

a.

July 1, Year 1

Prepaid Insurance                  $15000 Dr

     Cash                                       $15000 Cr

Dec 31, Year 1

Insurance expense                    $2500 Dr

    Prepaid Insurance                     $2500 Cr

b.

July 1, Year 1

Cash                                                  $15000 Dr

    Unearned Service revenue             $15000 Cr

Dec 31, Year 1

Unearned service revenue        $2500 Dr

    Service revenue                           $2500 Cr

Explanation:

a.

The company will record the cash going out of the business for prepaid insurance as credit and the asset account prepaid insurance as debit to record the prepayment of insurance for 3 years at the amount of $15000.

The insurance paid out is for 3 years. So, the per year insurance expense is,

Insurance expense per year = $15000 / 3 = $5000

The adjusting entry made on 31 december will record the insurance months consumed (6 months) as an expense and debit the insurance expense and credit the prepaid insurance asset account.

The insurance expense for 6 months = 5000 * 6/12 = $2500

b.

For the receiving company, the cash is being received and as the service will be provided later on, the cash received will be debited and the unearned service revenue will be credited.

As six months worth of cover has passed, on 31 December, the company will record service revenue for 6 months that is $2500 and debit the liability recorded under unearned service revenue.