Question

Reviewing insurance policies revealed that a single policy was purchased on August 1, for one year’s coverage, in the amount of $6,000. There was no previous balance in the Prepaid Insurance account at that time. Based on the information provided:

Make the December 31 adjusting journal entry to bring the balances to correct.
Show the impact that these transactions had on the Prepaid Insurance account by starting with the beginning balance and ending with the ending balance in the account.

Answer 1

Based on the amount of the insurance prepayment, the December 31 adjusting journal entry is:

Date               Account title                                Debit                Credit

Dec. 31          Insurance expense                     $2,500

                     Prepaid Insurance                                              $2,500

Opening balance of Prepaid Insurance = $6,000

Ending balance of Prepaid Insurance = $3,500

How are prepayments treated?

Prepayments are considered assets and so when they reduce they are credited.

Prepaid Insurance will therefore be credited with the insurance expense of the insurance amount that is already covered. This amount will go to the Insurance expense account. The amount is:

= 6,000 / 12 months of coverage x 5 months from August

= $2,500

Opening balance of prepaid insurance is the $6,000 and the closing balance would be:

= 6,000 - 2,500

= $3,500

Find out more on prepayments at https://brainly.com/question/27782315.

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