Question

Adjusting Journal Entries: [201280Q4020620] On Jan. 1, Year 4, Merle Company had a proper balance in Prepaid Insurance account of $15,960. The firm had paid $30,240 on August 1, Year 2 for a three-year insurance policy that became effective on that date. That was the only insurance policy for the firm in Years 2 and 3, [Hint: this policy expires on August 1, Year 5.] On May 1, Year 4, the firm purchased a second insurance policy to cover other risks. The firm paid $24,000 on May 1, Year 4, for a two-year policy that became effective on that date. When this payment was made on May 1, Year 4, the firm's untrained bookkeepers debited the entire payment into Insurance Expense while crediting Cash for the same amount. No other entries were made in any insurance-related account in Year 4 prior to the adjusting journal entry [AJE] you are about make at the end of Year 4. Required: Show the proper AJE at Dec. 31, Year 4, the end of Merle's fiscal year. Debit or Credit Account Title Amount Without prejudice to your answer above, assume no entries were made related to these policies in Year 5 prior to the AJE you are about to record on Dec. 31, Year 5. Required: Show the proper AJE at Dec. 31, Year 5. Debit or Credit Account Title Amount

Answer 1

Solution:

Date	Debit/ Credit	Account Title	Amount
Dec 31 Year 4	Debit	Prepaid Insurance	24000
	Credit	Insurance Expense	24000
	( To correct the entry that had been made by wrongly debiting Insurance Expense)
Dec 31 Year 4	Debit	Insurance Expense	18080
	Credit	Prepaid Insurance	18080
	(Adjusting entry to record the insurance expense incurred during year 4)
Dec 31 Year 5	Debit	Insurance Expense	17880
	Credit	Prepaid Insurance	17880
	(Adjusting entry to record the insurance expense incurred during year 5)

Computation
					Insurance Expense Incurred
Policy	Date of Purchase	Amount	No. of Policy months	Expense incurred per month	Year 2	Year 3	Year 4	Year 5	Year 6	Total
1	August 1, Year 2	$30240	3years*12 = 36 months	30240/36 = $840 per month	840*5 = $4200	840*12 = $10080	$10080	840*7 = 5880	-	$30240
2	May 1, Year 4	$24000	2 years*12 = 24 months	24000/24 = $1000	-	-	1000*8=$8000	1000*12=12000	1000*4=4000	$24000
	Total Expense Incurred				$4200	$10080	$18080	$17880	$4000