Answer:
Debit Prepaid insurance $8,000
Credit Cash account $8,000
Being entries to recognize prepaid insurance as at July 1 , 2008
Debit Insurance expense $2,000
Credit Prepaid Insurance $2,000
Being entries to recognize insurance expense as at December 31.
Explanation:
The amount paid by Sheeley Company On July 1, 2008 is a prepayment (an asset) as it is paid in advance. The insurance cover was yet to be enjoyed as at that date.
Entries required to recognize this payment
Debit Prepaid insurance $8,000
Credit Cash account $8,000
Being entries to recognize prepaid insurance as at July 1 , 2008
As at 31 December, the company would have incurred expenses for 6 months out of the 24 months (2 years) paid for.
This amounts to
= 6/24 × $8,000
= $2,000
To recognize this by December 31
Debit Insurance expense $2,000
Credit Prepaid Insurance $2,000
Being entries to recognize insurance expense as at December 31.
