Question

Arnez Company’s annual accounting period ends on December 31, 2017. The following information concerns the adjusting entries to be recorded as of that date.

1. An analysis of the company's insurance policies provided the following facts.
     

Policy	Date of Purchase	Months of Coverage	Cost
A	April 1, 2015	24	$	11,832
B	April 1, 2016	36		10,584
C	August 1, 2017	12		9,432

Answer 1

Insurance policy (A) purchased on April 1, 2015: It has coverage of 24 months. It means that the policy covers period from April 1, 2015 to March 31, 2017. Monthly expense for the policy is $11832 /24 = $493. When the policy was purchased on April1 2015, the following journal entry was made:

Journal entry on April 1 2015:

Debit: Prepaid insurance $11832

Credit Cash $11832

Now, On December 31, 2017, we will book the journal entry for 3 months of insurance i.e. January 2017, February 2017 and March 2017, for this policy Three months' insurance amount is 3* $493 = $1479. So, a total of $1479 for policy A will be debited to insurance expense and credited to prepaid insurance (because earlier prepaid insurance was debited, so it wil be credited now)

Insurance policy (B) purchased on April 1, 2016: It has coverage of 36 months. It means that the policy covers period from April 1, 2016 to March 31, 2019. Monthly expense for the policy is $10584 /36 = $294. When the policy was purchased on April1 2016, the following journal entry was made:

Journal entry on April 1 2016:

Debit: Prepaid insurance $10584

Credit Cash $10584

Now, On December 31, 2017, we will book the journal entry for 12 months of insurance i.e. from January 2017 to December 2017, for this policy Twelve months' insurance amount is 12* $294 = $3528. So, a total of $3528 for policy B will be debited to insurance expense and credited to prepaid insurance. (because earlier prepaid insurance was debited, so it wil be credited now)

Insurance policy (C) purchased on August 1, 2017: It has coverage of 12 months. It means that the policy covers period from August 1, 2017 to July 31, 2018. Monthly expense for the policy is $9432 /12 = $786. When the policy was purchased on August 1, 2017, the following journal entry was made:

Journal entry on August 1, 2017:

Debit: Prepaid insurance $9432

Credit Cash $9432

Now, On December 31, 2017, we will book the journal entry for 5 months of insurance i.e. from August 1, 2017 to December 2017, for this policy Five months' insurance amount is 5 * $786 = $3930. So, a total of $3930 for policy C will be debited to insurance expense and credited to prepaid insurance. (because earlier prepaid insurance was debited, so it wil be credited now)

Now, to sum up, we will debit the Insurance expense account for the policies as per below:

Policy A : $1479

Policy B: $3528

Policy C : $3930

Total : $8937

Now, required journal entry on December 31, 2017:

Debit Insurance expense $8937

Credit Prepaid insurance $8937