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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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On July 1, Friler Company purchased a 1-year insurance policy by paying $5,400. Prepare journal entries to record the purchase and the related year-end adjusting entry.

To determine

Prepare the journal entry and year-end adjusting for Company F.

Explanation

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Adjusting entries: Adjusting entries are those entries which are recorded at the end of the year, to update the income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and stockholders’ equity) to maintain the records according to accrual basis principle.

To record the journal entry for purchase of insurance policy:

DateAccount title and explanationDebit ($)Credit ($)
July 1Prepaid insurance5,400 
 Cash 5,400
 (To record the purchase of insurance policy)  

Table (1)

  • Prepaid insurance is an asset account and it is increased. Therefore, debit prepaid insurance account with $5,400.
  • Cash is an asset account and it is decreased. Therefore, credit cash account with $5,400...

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