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 determine the adjusting entry for prepaid insurance on Dec 31, 2008, you need to calculate the portion of insurance expense that pertains to the year ending in 2008. Since the policies have different durations and start dates, you will need to prorate the amounts based on the remaining months in each policy.
Here's how to calculate the adjustments for each policy:
1. Policy A:
- Policy A was purchased on April 1, 2007, and it has a duration of 24 months. As of Dec 31, 2008, the policy has been active for 21 months (from April 2007 to December 2008).
- Divide the remaining months (21) by the total duration (24) to calculate the percentage of the policy that covers 2008: 21 / 24 = 0.875 (87.5%).
- Multiply this percentage by the total cost of the policy ($11,400) to determine the insurance expense for 2008: $11,400 * 0.875 = $9,975.
- Debit insurance expense for $9,975 and credit prepaid insurance for the same amount.
2. Policy B:
- Policy B was purchased on April 1, 2008, and it has a duration of 36 months. As of Dec 31, 2008, the policy has been active for 9 months (from April 2008 to December 2008).
- Divide the remaining months (9) by the total duration (36) to calculate the percentage of the policy that covers 2008: 9 / 36 = 0.25 (25%).
- Multiply this percentage by the total cost of the policy ($10,200) to determine the insurance expense for 2008: $10,200 * 0.25 = $2,550.
- Debit insurance expense for $2,550 and credit prepaid insurance for the same amount.
3. Policy C:
- Policy C was purchased on August 1, 2008, and it has a duration of 12 months. As of Dec 31, 2008, the policy has been active for 5 months (from August 2008 to December 2008).
- Divide the remaining months (5) by the total duration (12) to calculate the percentage of the policy that covers 2008: 5 / 12 = 0.4167 (41.67%).
- Multiply this percentage by the total cost of the policy ($9,000) to determine the insurance expense for 2008: $9,000 * 0.4167 = $3,750.
- Debit insurance expense for $3,750 and credit prepaid insurance for the same amount.
Once you have calculated the insurance expense for each policy, sum them all up to find the total insurance expense for the year. Debit insurance expense for the total amount, and credit prepaid insurance for the same total amount.
Remember, it's always a good idea to consult with a professional accountant or refer to your company's accounting policies to ensure accuracy and compliance with accounting standards.