Question

On April 1, Lewis Company paid $14,400 for two years of insurance in advance. Lewis Company recorded the transaction by debiting Prepaid Insurance an crediting Cash. Required: Journalize the adjusting entry on December 31.

Answer 1

Answer:

31 Dec       Expense A/c Dr.                      $5,400

                         To Prepaid Expense A/c                   $5,400

(Therefore, expense for the current financial year recorded)

Explanation:

We know that at the time of insurance paid in advance on 1 April for 2 years, entry was;

Prepaid Insurance A/c Dr.            $14,400

                 To Cash A/c                                      $14,400

Now at year end the expense relating to current period shall be recognized properly in the books, so that matching principle of revenue against expenses shall be matched.

Thus, period from 1 April to 31 December = 9 months

Expense for 9 months = $14,400 \times \frac{9}{24} = 5,400$

That means expense for the year = $5,400

Therefore, entry for such recording will be:

31 Dec       Expense A/c Dr.                      $5,400

                         To Prepaid Expense A/c                   $5,400

(Therefore, expense for the current financial year recorded)