Adjustment for prepaid expense

Question

The prepaid insurance account had a beginning balance of $6,000 and was debited for $12,500 of premiums paid during the year.

Journalize the adjusting entry required at the end of the year, assuming the amount of unexpired insurance related to future periods is $13,000. If an amount box does not require an entry, leave it blank.

Answer 1

To prepare the adjusting entry for the prepaid insurance account, we need to determine how much insurance expense has been incurred during the year.

1. Start with the beginning balance of prepaid insurance: $6,000.
2. Add the premiums paid during the year: $12,500.
3. Calculate the total prepaid insurance available: \[ 6,000 + 12,500 = 18,500 \]
4. Determine the unexpired insurance at the end of the year, which is given as $13,000.
5. To find the amount of insurance that has been used up (insurance expense), subtract the unexpired insurance from the total prepaid insurance: \[ 18,500 - 13,000 = 5,500 \] This means $5,500 of the prepaid insurance has been used and should be recognized as an insurance expense.

Now we can journalize the adjusting entry:

Journal Entry

| Date | Account Title | Debit | Credit | |---------------|--------------------------|-------------|-------------| | [Date] | Insurance Expense | $5,500 | | | | Prepaid Insurance | | $5,500 |

This entry reflects the recognition of the insurance expense for the period. The prepaid insurance account is credited to reflect the reduction in prepaid insurance.