Question

Mountaineer Excavation operates in a low-lying area that is subject to heavy rains and flooding. Because of this, Mountaineer purchases one year of flood insurance in advance on March 1, paying $36,000 ($3,000/month).
Required:
1. Recore the purchase of insurance in advance on March,1.

Answer 1

Explanation:

1. The journal entry is as follows:

On March 1

Prepaid insurance A/c Dr $36,000

       To Cash A/c $36,000

(Being the prepaid insurance is recorded for cash)

For recording the advance purchase of insurance, we debited the prepaid insurance and credited the cash account. Both the accounts are recorded at $36,000 so that the proper posting could be done.