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Adjusting entries for prepaid insurance The prepaid insurance account had a balance of $3,000 at the beginning of the year. The account was debited for $32,500 for premiums on policies purchased during the year. Journalize the adjusting entry required under each of the following alternatives for determining the amount of the adjustment: (A) the amount of unexpired insurance applicable to future periods is $4,800; (B) the amount of insurance expired during the year is $30,700.

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Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663

Solutions

Chapter
Section
BuyFindarrow_forward

Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663
Chapter 3, Problem 15E
Textbook Problem
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Adjusting entries for prepaid insurance

The prepaid insurance account had a balance of $3,000 at the beginning of the year. The account was debited for $32,500 for premiums on policies purchased during the year. Journalize the adjusting entry required under each of the following alternatives for determining the amount of the adjustment: (A) the amount of unexpired insurance applicable to future periods is $4,800; (B) the amount of insurance expired during the year is $30,700.

A.

To determine

Prepare the adjusting entry for insurance expense at the end of the year.

Explanation of Solution

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  All adjusting entries affect at least one income statement account (revenue or expense), and one balance sheet account (asset or liability).

Rule of Debit and Credit:

Debit - Increase in all assets, expenses & dividends, and decrease in all liabilities and stockholders’ equity.

Credit - Increase in all liabilities and stockholders’ equity, and decrease in all assets & expenses.

An adjusting entry for insurance expense:

In this case, the business recognized the insurance expenses at the end of the year. So, the necessary adjusting entry that the business should record to recognize the insurance expense is as follows:

DateDescription

Post.

Ref

Debit

($)

Credit

($)

 Insurance expense (1)   30,700 
 Prepaid insurance  30,700
 (To record the insurance  expense incurred at the end of the year)   

Table (1)

The impact on the accounting equation for the above referred adjusting entry is as follows:

{Assets-$30,700}=Liabilities+{Owners'Equity-$30,700}

Working note (1):

Calculate the value of insurance expense at the end of the year

   &

B.

To determine

Prepare adjusting entry for expired insurance at the end of the year.

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Chapter 3 Solutions

Financial And Managerial Accounting
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