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 calculate the adjusting entry for prepaid insurance on December 31, 2008, you need to determine the amount of insurance expense that has been incurred for the year and adjust the prepaid insurance account accordingly.
First, let's break down the policies and determine the number of months remaining for each policy as of December 31, 2008:
Policy A: Purchased on April 1, 2007 for 24 months
Months remaining as of Dec 31, 2008: 24 - 21 = 3 months
Policy B: Purchased on April 1, 2008 for 36 months
Months remaining as of Dec 31, 2008: 36 - 9 = 27 months
Policy C: Purchased on August 1, 2008 for 12 months
Months remaining as of Dec 31, 2008: 12 - 5 = 7 months
Now let's calculate the insurance expense for each policy based on the remaining months:
Policy A: 3/24 * $11,400 (total premium) = $1,425
Policy B: 27/36 * $10,200 (total premium) = $7,650
Policy C: 7/12 * $9,000 (total premium) = $5,250
Add up the insurance expenses for each policy to get the total insurance expense:
$1,425 + $7,650 + $5,250 = $14,325
To make the adjusting entry, you will debit Insurance Expense for $14,325 (increasing the expense) and credit Prepaid Insurance for $14,325 (decreasing the asset). This entry reflects the portion of insurance that has been used during the year (expense) and the portion that is still prepaid (asset).
Make sure to consult with an accounting professional or refer to your company's accounting policies to ensure the proper treatment of adjusting entries.