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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615

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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615
Textbook Problem
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Adjusting entries for prepaid insurance

The prepaid insurance account had a balance of $7,000 at the beginning of the year. The account was debited for $24,000 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 $8,500; (b) the amount of insurance expired during the year is $22,500.

(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).

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.

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

Explanation

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

($)

XXX Insurance expense (1)    22,500  
  Prepaid insurance     22,500
  (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-$22,500}=Liabilities+{Owners'Equity-$22,500}

Working note:

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

InsuranceExpenses=(

(b)

To determine

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

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