Question

On July 1, 2018, a two-year insurance premium on equipment in the amount of $792 was paid and debited in full to Prepaid Insurance on that date. Coverage began on July 1. Give the adjusting journal entry required for each item at December 31, 2018.

Answer 1

The insurance premium was paid for 2 years on July 1, 2018. The amount related to the current year should be charged to expenses as the benefit of insurance has already been availed in the current year ending December 31

So, we need to calculate the amount relating to current period

Total number of months in 2 years

= Years x 12

= 2 x 12

= 24 months

Number of months from July 1,2018 to December 31,2018

= 6 months

So, Amount relating to current year

= Total amount paid / Total period x Expired period

= $792 / 24 x 6

= $198

At the time of payment of the total amount of $792, following entry was passed

Prepaid Insurance       $792

       Bank / Cash                        $792

(Being premium paid for 2 years)

The adjusting entry on December 31 to rectify the mistake would be as follows

Insurance Expenses       $198

       Prepaid Insurance         $198

(Being expired portion of insurance relating to current period transferred to expenses)