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Financial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781305088436

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BuyFindarrow_forward

Financial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781305088436
Chapter 3, Problem 3PEB
Textbook Problem
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The prepaid insurance account had a beginning balance of $9,600 and was debited for $12,900 of premiums paid during the year. Journalize the adjusting entry required at the end of the year, assuming the amount of unexpired insurance related to future periods is $7,360.

To determine

Prepare the adjusting entry 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).

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.

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

DateDescription

Post.

Ref

Debit

($)

Credit

($)

XXXInsurance expense  (1)15,140 
 Prepaid insurance 15,140
 (To record the insurance  expense incurred at the end of the year)  

Table (1)

  • Insurance expense decreases the value of owners’ equity by $15,140 hence debit the insurance expense for $15,140...

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Chapter 3 Solutions

Financial Accounting
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