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Adjusting entries for prepaid insurance The balance in the prepaid insurance account, before adjustment at the end of the year, is $27,000. Journalize the adjusting entry required under each of the following alternatives for determining the amount of the adjustment: (A) the amount of insurance expired during the year is $20,250; (B) the amount of unexpired insurance applicable to future periods is $6,750.

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Corporate Financial Accounting

15th Edition
Carl Warren + 1 other
Publisher: Cengage Learning
ISBN: 9781337398169
BuyFindarrow_forward

Corporate Financial Accounting

15th Edition
Carl Warren + 1 other
Publisher: Cengage Learning
ISBN: 9781337398169
Chapter 3, Problem 3.14EX
Textbook Problem
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Adjusting entries for prepaid insurance

The balance in the prepaid insurance account, before adjustment at the end of the year, is $27,000. Journalize the adjusting entry required under each of the following alternatives for determining the amount of the adjustment: (A) the amount of insurance expired during the year is $20,250; (B) the amount of unexpired insurance applicable to future periods is $6,750.

A.

To determine

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).

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
  • Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

To prepare: The adjusting entry at the end of the year.

Explanation of Solution

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:

Date Description

Post.

Ref

Debit

($)

Credit

($)

  Insurance expense     20,250  
  Prepaid insurance     20,250
  (To record the insurance  expense incurred at the end of the year)      

Table (1)

  • Insurance expense decreases the value of stockholders’ equity by $20,250 hence debit the insurance expense for $20,250...

B.

To determine

To prepare: The adjusting entry at the end of the year.

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Chapter 3 Solutions

Corporate Financial Accounting
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