On April 1, 2009, the company paid an insurance company $5,000 for a two-year fire insurance policy. The entire $5,000 was debited to insurance expense.
What is the Dec. 31, 2009 adusting journal entry?
Prepaid Insurance xx
Insurance expense xx
I can't figure out the values for this journal entry. I tried 5,000/24 * 9 = 1875 but that's wrong. Can you help me?
Just take the $5,000 and multiply it by the remaining months.
April-December is 9 months so subtract that from 24 to get 15.
(5,000*15/24) which should equal 3,125.
To determine the correct amount for the adjusting journal entry, you need to understand the concept of prepaid expenses and the related time period.
In this case, the company paid $5,000 on April 1, 2009, for a two-year fire insurance policy. The entire $5,000 was debited to insurance expense when it was paid. However, since the payment covered two years, the company needs to allocate the expense over the appropriate time period.
To calculate the adjusting journal entry for December 31, 2009, you need to determine the number of months that have passed since the policy was paid.
Here's the correct calculation:
1. Determine the total number of months in the insurance policy period:
Two-year policy = 24 months
2. Calculate the number of months that have passed from April 1, 2009, to December 31, 2009:
April to December = 9 months
3. Divide the number of months that have passed by the total number of months in the policy period:
9 months / 24 months = 0.375
4. Multiply the result by the total prepaid insurance amount to determine the expense to be recognized in the accounting period:
$5,000 x 0.375 = $1,875
Therefore, the adjusting journal entry for December 31, 2009, would be:
Prepaid Insurance $1,875
Insurance expense $1,875
By recognizing $1,875 as insurance expense in December 2009, you are only accounting for the portion of the prepaid insurance that has been used up or expired by that date. The remaining prepaid insurance amount will be expensed in future periods as time passes.