Question

A company has a fiscal year-end of December 31: (1) on October 1, $14,000 was paid for a one-year fire insurance policy; (2) on June 30 the company advanced its chief financial officer $12,000; principal and interest at 6% on the note are due in one year; and (3) equipment costing $62,000 was purchased at the beginning of the year for cash. Depreciation on the equipment is $12,400 per year. Prepare the necessary adjusting entries at December 31 for each of the above items.

Answer 1

Date	General Journal	Debit	Credit
Dec. 31	Insurance expense	$3,500
	Prepaid insurance		$3,500
	( To record insurance expense)
Dec. 31	Interest receivable	$360
	Interest revenue		$360
	( To record interest revenue)
Dec. 31	Depreciation expense	$12,400
	Accumulated depreciation- Equipment		$12,400
	( To record depreciation expense)

1.

Insurance expense for 1 year = $14,000

Insurance expense for 3 months ( October 1 to December 31) = 14,000 x 3/12

= $3,500

2.

Interest receivable at December 31 = Note receivable x Interest rate x 6/12

= 12,000 x 6% x 6/12

= $360