Question

On July 1, 2017, Ling Co. pays $7,440 to Pina Colada Corp. for a 2-year insurance contract. Both companies have fiscal years ending December 31. For Ling Co., enter the July 1 transaction and the December 31 adjustment in the tabular summary that follows. (If a transaction results in a decrease in Assets, Liabilities or Stockholders' Equity, place a negative sign (or parentheses) in front of the amount entered for the particular Asset, Liability or Equity item that was reduced.)

Answer 1

Answer:

For Ling Co., we have the following transaction recording in their accounting book:

* July 1st 2017 transaction, the journal entry is:

Dr Prepaid Insurance              7,440

Cr Cash                                   7,440

( to record purchased and paid of 2-year insurance)

* For December 31st 2017, the adjustment transaction relating to Insurance Expenses:

Dr Insurance Expenses            1,860

Cr Prepaid Insurance               1,860

( to record insurance expenses for the second-half of 2017)

Working note: As the insurance is for 2-year, the Insurance expenses for one-year is 7,440/2 = $3,720; subsequently, the Insurance expenses for half-year is 3,720/2 = $1,860. Because as at December 31st 2017, the insurance policy has been passed by 6 months, Insurance expenses is recorded ( Dr) at half-year cost while Prepaid Insurance - an asset account recording Insurance fee paid yet not consumed fully - is Credited by the same amount to show how much Insurance fee has actually incurred.

So, the Asset account is decreased by $1,860 through the December 31st 2019 adjustment.

Explanation: