Question

A firm purchased a three-year insurance policy for $13,500 on July 1, 2019. The $13,500 was debited to the Prepaid Insurance account. On December 1, 2019, a firm signed a contract with a local radio station for advertising that will extend over a two-year period. The firm paid $36,000 in advance and debited the amount to Prepaid Advertising. Prepare end-of-month adjusting entries for each of the above situations.

Answer 1

Answer:

The journal entries should be as follows:

July 1, purchase of 3-year insurance policy

Dr Prepaid insurance 13,500

    Cr Cash 13,500

December 1, paid for two years of advertising in local radio

Dr Prepaid advertising 36,000

    Cr Cash 36,000

By December 31, the adjusting journal entries should be:

Dr Insurance expense 2,250

    Cr Prepaid insurance 2,250

*insurance expense = ($13,500 / 36 months) x 6 months = $2,250

Dr Advertising expense 1,500

    Cr Prepaid advertising 1,500

*advertising expense = ($36,000 / 24 months) x 1 month = $1,500