Question

On March 1, Taylor Company paid $19,200 for two years of insurance in advance.

Required: 1. How much will be expensed by the end of the calendar year?

2. How much will be in the Prepaid Insurance account at the end of the year, after the adjusting entries have been prepared and posted? 1. Amount expensed : 2. Amount in the Prepaid Insurance account :

Answer 1

1) Period of Calendar year = January 1 to December 31

Insurance premium paid for 2 years or 24 months starting from March 1, first year.

So , only 10 months insurance premium exhausted during first calendar year ( March 1 to December 31) and booked as insurance expense.

Insurance expense by the end of Calendar year = $ 19,200 X 10/24 = $ 8,000

2) Prepaid insurance at the end of the year ( 1st calendar year) = Total insurance premium paid - Insurance expense by the end of 1st calendar year = $ 19,200 - $ 8,000 = $ 11,200

For your reference, following are the related journal entries and ledger for prepaid insurance during 1st calendar year :

Journal Entries

Date	Accounts title and explanation	Debit($)	Credit($)
March 1, 1st Year	Prepaid Insurance	19,200
	Cash		19,200
	[Insurance premium paid in advance for 24 months ]
December 31, 1st Year	Insurance Expense ( 19,200 X 10/24)	8,000
	Prepaid insurance		8,000
	Adjustment entry made for insurance expense at the end of the year ]

Prepaid Insurance

Date	Accounts title	$	Date	Accounts title	$
March 1	Cash	19,200	December 31	Insurance Expense	8,000
December 31	Balance	11,200

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