Question

The 12/31/17 balance in the prepaid insurance account is composed of the following policies:

                                  Coverage                                                      

                                     Period                                                   Amount

                              1/1/17-12/31/18                                              $8,368

                              6/1/17-11/30/18                                                4,800

                              12/1/17-5/31/18                                                2,000

Prepare the adjusting journal entry for 12/31/17

Answer 1

1/1/17 to 12/31/18:

This is the duration of 2 years.

Since the adjustment entry is to be made at 12/31/17, the gap of 1/1/17 to 12/31/17 is 1 year.

Prepaid insurance is for remaining (2 – 1 =) 1 year.

Amount of prepaid insurance = 8368 × (1/2) = $4,184

Prepaid expense is debit, since it creates an asset, and insurance premium expense is credit, since the expense is to be reduced at the end of the year 2017.

Journal

Date	Account titles and explanations	P. ref.	Debit	Credit
12/31/17	Prepaid expense		$4,184
	Insurance premium expense			$4,184
	To record adjusting entry at the end of the period.

6/1/17 to 11/30/18:

This is the duration of 18 months.

Since the adjustment entry is to be made at 12/31/17, the gap of 6/1/17 to 12/31/17 is 7 months.

Prepaid insurance is for remaining (18 – 7 =) 11 months.

Amount of prepaid insurance = 4800 × (11/18) = $2,933 rounded

Prepaid expense is debit, since it creates an asset, and insurance premium expense is credit, since the expense is to be reduced at the end of the year 2017.

Journal

Date	Account titles and explanations	P. ref.	Debit	Credit
12/31/17	Prepaid expense		$2,933
	Insurance premium expense			$2,933
	To record adjusting entry at the end of the period.

12/1/17 to 5/31/18:

This is the duration of 6 months.

Since the adjustment entry is to be made at 12/31/17, the gap of 12/1/17 to 12/31/17 is 1 month.

Prepaid insurance is for remaining (6 – 1 =) 5 months.

Amount of prepaid insurance = 2000 × (5/6) = $1,667 rounded

Prepaid expense is debit, since it creates an asset, and insurance premium expense is credit, since the expense is to be reduced at the end of the year 2017.

Journal

Date	Account titles and explanations	P. ref.	Debit	Credit
12/31/17	Prepaid expense		$1,667
	Insurance premium expense			$1,667
	To record adjusting entry at the end of the period.