I have to prepare an adjusting entry for Dec 31, 2008 for prepaid insurance from this:
An analysis of the company's insurance policies provided these facts:
Policy A Purchased on April 1, 2007 for 24 month at $11400.
Policy B Purchased on April 1, 2008 for 36 months at $10200.
Policy C Purchased on August 1, 2008 for 12 months at $9000.
The total premium for each policy was paid in full (for all months) at the purchase date, and the Prepaid Insurance account was debited for the full cost. (Year-end adjusting entries for Prepaid Insurance were properly recorded in all prior years.)
I can't seem to figure out how much money to debit insurance expense for and to credit prepaid insurance. Can anyone help? THANKS.
To prepare the adjusting entry for prepaid insurance on December 31, 2008, you need to calculate the portion of insurance coverage that has expired as of that date. The expired insurance coverage represents the insurance expense for the year.
Here's how you can calculate the adjusting entry:
1. Analyze the insurance policies:
- Policy A: purchased on April 1, 2007, for 24 months at $11,400.
- Policy B: purchased on April 1, 2008, for 36 months at $10,200.
- Policy C: purchased on August 1, 2008, for 12 months at $9,000.
2. Determine the total number of months covered by each policy as of December 31, 2008:
- Policy A: April 1, 2007, to March 31, 2009 (24 months coverage)
- Policy B: April 1, 2008, to March 31, 2011 (36 months coverage)
- Policy C: August 1, 2008, to July 31, 2009 (12 months coverage)
3. Calculate the portion of coverage that has expired as of December 31, 2008:
- Policy A: 24 months - 21 months (expired) = 3 months (unexpired)
- Policy B: 36 months - 9 months (expired) = 27 months (unexpired)
- Policy C: 12 months - 5 months (expired) = 7 months (unexpired)
4. Determine the monthly cost for each policy:
- Policy A: $11,400 / 24 months = $475 per month
- Policy B: $10,200 / 36 months = $283.33 per month
- Policy C: $9,000 / 12 months = $750 per month
5. Calculate the insurance expense for each policy as of December 31, 2008:
- Policy A: 3 months (unexpired) * $475 per month = $1425
- Policy B: 27 months (unexpired) * $283.33 per month = $7666.67
- Policy C: 7 months (unexpired) * $750 per month = $5250
6. Prepare the adjusting entry:
Debit Insurance Expense for the total insurance expense calculated above, which is the amount of coverage that has expired:
Insurance Expense: $1425 + $7666.67 + $5250 = $14,341.67
Credit Prepaid Insurance for the total prepaid insurance amount initially recorded:
Prepaid Insurance: $11,400 + $10,200 + $9,000 = $30,600
So, the adjusting entry on December 31, 2008, would be:
Debit Insurance Expense: $14,341.67
Credit Prepaid Insurance: $30,600
This entry recognizes the expired insurance coverage as an expense and reduces the prepaid insurance account accordingly.