on jan 1 abc purchased a 5 year insurance policy for 1800 with coverage starting immediately....

on jan 1 abc purchased a 5 year insurance policy for 1800 with coverage starting immediately. the purchase was recorded as a prepaid expense. provide the dec 31 year end adjusting entry

Solutions

Expert Solution

The gap of 1^st January to 31^st December in the same year is 12 months.

Since the policy is taken for 5 years for a single sum payment of 1,800, insurance expense for the above completed year is calculated as below:

Insurance expense = (Total premium / Number of years of recovery) × applicable years

= (1800 / 5) × 1

= $360

This is to be debited, since the expense is chargeable for the year; and prepaid expense is to be credited, since it reduces the account after charging.

Journal

Date	Account titles and explanation	Ref.	Debit	Credit
31^st Dec.	Insurance expense		$360
	Prepaid expense			$360
	To record insurance expense at the year-end

ekkarill92 answered 1 year ago

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