unadjusted trial balance (December 31,2008): Prepaid insurance $3600
Adjusting entry question: 18 months of preperty insurance was purchased on Sept 1 2007 at a cost of $3600.
To determine the adjusting entry for prepaid insurance, you need to consider the amount of time that has passed since the insurance was initially purchased. In this case, we are given that 18 months of property insurance was purchased on September 1, 2007, at a cost of $3,600.
First, let's calculate the number of months that have passed from September 1, 2007, to December 31, 2008. This will help us determine the amount of insurance that has been used up or expired.
Number of months from September 1, 2007, to December 31, 2008:
= (12 months in 2008) + (4 months from September 1, 2007, to December 31, 2007)
= 12 + 4
= 16 months
Since 18 months of insurance were purchased, and only 16 months have passed, there are 2 months of insurance remaining.
Now, to calculate the amount of insurance expired, we will divide the cost of the insurance by the total number of months it covers and then multiply it by the number of months that have expired.
Insurance expired = (Cost of insurance / Total number of months) * Number of months expired
= ($3,600 / 18) * 16
= $3,200
The adjusting entry for prepaid insurance will be to decrease prepaid insurance by the amount of insurance that has expired and to increase insurance expense by the same amount.
Adjusting entry:
Debit: Insurance Expense $3,200
Credit: Prepaid Insurance $3,200
This adjustment reflects the portion of the prepaid insurance that has been used up or expired during the period from September 1, 2007, to December 31, 2008.