Question

On March 31, 20X8, your calendar year company takes out a 3-year insurance policy with a premium of $5,000 per year. The entire $15,000 is paid in advance on March 31, 20X8 and is recorded as prepaid insurance. On December 31, 20X8, you discover that the adjusting entry debited Insurance Expense for $5,000 and credited Prepaid Insurance for $5,000. Your correcting journal entry will: debit Prepaid Insurance for $1,250; credit Insurance Expense for $1,250 debit Prepaid Insurance for $3,750; credit Insurance Expense for $3,750 debit Insurance Expense for $1,250; credit Prepaid Insurance for $1,250 debit Prepaid Insurance for $5,000; credit Insurance Expense for $5,000 debit Insurance Expense for $3,750; credit Prepaid Insurance for $3,750 not be necessary because the original adjusting entry was correct

Answer 1

Total amount of insurance = 5,000. This amount is for a period of 3 years.

Thus amount, per year, will be = 5,000/3 = $1,667.67 per year.

Period during 31st March 20X8 to December 31, 20X8 = 9 months or 9/12 = 0.75 years.

Thus the amount that will have to be booked as expenses for this year = 1666.67*0.75 = $1,250

The entry on December 31, 20X8 should have been to debit insurance expenses and credit prepaid insurance by $1,250.

But, the entry that was made was that Insurance expense was debited with $5000 and prepaid insurance expense was credited with 5000. This will have to be reversed and insurance expenses will be credited and prepaid insurance will be debited. Amount will be = 5000-1250 = 3750.

Thus the correcting entry will be:

Date	Particulars	Dr	Cr
31-Dec	Prepaid Insurance	3,750.00
	Insurance expense		3,750.00

Hence the answer is "debit Prepaid Insurance for $3,750; credit Insurance Expense for $3,750".