Answer:
See explanation section
Explanation:
Adjusting Entries
Requirement 1
December 31 Insurance Expense Debit $3,000
Prepaid Insurance Credit $3,000
Note: As the company purchased a 3-year life insurance on July 1, 2021, the insurance policy will be expired on June 30, 2024. However, the insurance expense for December 31, 2021 will be for 6 months (July 1, 2021 to December 31, 2021).
Calculation:
Prepaid Insurance (3 years policy) = $18,000, so each year insurance policy will be expired = $18,000 ÷ 3 = $6,000.
Since the insurance will be expired for 6 months in 2021, the insurance expense will be = ($6,000 × 6 months) ÷ 12 months = $3,000
Requirement 6
December 31 Interest expense Debit $3,000
Interest payable Credit $3,000
Note: As the company borrowed $36,000 for five years, the interest is to be paid on March 1, 2022. Therefore the interest expense will be accrued for 10 months (March 1, 2021 to December 31, 2021).
Interest expense will be = $36,000 × 10% × (10/12) = $3,000. Whichever the maturity date to be paid the entire amount will not be affected in that case.
