Question

A two-year damage insurance policy was purchased on October 1, 2019, for €8,000. The firm debited prepaid insurance for the entire amount. The necessary adjusting entry at December 31, 2019, should be:

Select one:

a. Debit: Insurance expenses, €1,000; Credit: Prepaid insurance expenses, €1,000.

b. Debit: Cash, €1,000; Credit: Prepaid insurance expenses, €1,000.

c. Debit: Prepaid insurance expenses, €1,000; Credit insurance expenses, €1,000.

d. Debit: Cash, €8,000; Credit: Ιnsurance expenses, €8,000.

e. Debit: Insurance expenses, €8,000; Credit: Prepaid insurance expenses, €8,000.

Answer 1

so firm has taken insurance for the 24 months but from that 24 months only the 3-months pertain to this year so we have debited whole expence by Pre Paid insurance expences account which is wrong treatment.

so to give adjusting entry we have to calculate first the premium paid in advance, premium of 21 months was paid in advance.

24 Months = 8000

21 Months = ?

=21*8000/24

=7000

so we have paid 7000 as prepaid insurance and 1000 as the current years insurance so thee currenct year insurance should be treated as Insurance expences and to give this treatment below Journal Entry is given:-

Journal Entry will be :-

a. Debit: Insurance expenses, €1,000; Credit: Prepaid insurance expenses, €1,000