Answer:
July 1, 2020
Dr. Prepaid Insurance $15,420
Cr. Cash __________ $15,420
December 31, 2020
Dr. Insurance Expense_$2,570
Cr. Prepaid Insurance _$2,570
Explanation:
Prepaid Expense is the payment of an expense made before it accrued ( means advance payment of an expense ).
As Ayayai Co. paid the 3 years insurance in advance. It is the form of prepaid insurance. Prepaid insurance will be charged to the insurance expense account with the passage of time.
On July 1
The cash is paid so, the cash account will be credited because it is an asset account that has a debit nature. To reduce its balance we need to credit it.
On the other hand, cash is made against the advance payment of insurance for three years, prepaid insurance account will be debited because it is an asset account that needed to be debited to record this.
December 31
The Insurance expense for 6 months is accrued and it needs an adjusting entry to record the expense.
To record Insurance expense, the insurance expense account is debited and on the other hand to reduce the balance of prepaid insurance by the accrued expense value prepaid insurance account is credited.
Insurance expense = $15,420 x 6 / ( 12 x 3 ) = $2,570
