Question

AtoZ Co. purchased a 3-year insurance policy on February 1, 2020, for $19,440. a. Record the entry for the purchase of the insurance coverage on February 1, 2020, recording the full amount as prepaid insurance. b. Record the required adjusting entry on December 31, 2020. Note: Round your answers to the nearest dollar. For example, enter 50 for 50.49 and enter 51 for 50.50

Answer 1

Answer:

a.

Feb 1, 2020

Prepaid Insurance                         19440 Dr

       Cash                                             19440 Cr

b.

Dec 31, 2020

Insurance Expense                       5940 Dr

       Prepaid Insurance                       5940 Cr

Explanation:

a.

The purchase of 3 year insurance on 1 Feb 2020 will be recorded by adding the amount of purchase to the prepaid insurance account as it is an advanced purchase of policy. The resulting credit account will be cash which will represent payment for the insurance.

b.

The adjusting entry will be passed based on accrual or matching principle. The insurance expense per month is,

Insurance expense per month = 19440 / 36 = $540

The insurance expense for 2020 = 540 * 11 = $5940

The insurance expense will be debited by $5940 and prepaid insurance will be credited.