Question

QS 3-5 Prepaid (deferred) expenses adjustments LO P1 For each separate case below, follow the three-step process for adjusting the prepaid asset account at December 31. Step 1: Determine what the current account balance equals. Step 2: Determine what the current account balance should equal. Step 3: Record the December 31 adjusting entry to get from step 1 to step 2. Assume no other adjusting entries are made during the year

a. Prepaid Insurance. The Prepaid Insurance account has a $6,000 debit balance to start the year. A review of insurance policies and payments shows that $1,550 of unexpired insurance remains at year-end. Prepaid Insurance Step 1: Determine what the current account balance equals. Step 2: Determine what the current account balance should equal. Step 3: Record the December 31, adjusting entry to get from step 1 to step 2. b. Prepaid Insurance. The Prepaid Insurance account has a $7,190 debit balance at the start of the year. A review of insurance policies and payments shows $1,560 of insurance has expired by year-end. Prepaid Insurance Step 1: Determine what the current account balance equals. Step 2: Determine what the current account balance should equal. Step 3: Record the December 31, adjusting entry to get from step 1 to step 2. c. Prepaid Rent. On September 1 of the current year, the company prepaid $39,600 for two years of rent for facilities being occupied that day. The company debited Prepaid Rent and credited Cash for $39,600. Prepaid Rent Step 1: Determine what the current account balance equals. Step 2: Determine what the current account balance should equal. Step 3: Record the December 31, adjusting entry to get from step 1 to step 2.

Answer 1

a)			Dr or Cr	Prepaid insurance
Step 1	Determine what the current account equals	$6,000	Debit	$6,000
					$4,450
Step 2	Determine what the current account should equal	$1,550	Debit	$1,550
Step 3	Record the December 31, adjusting to get from step 1 and step 2
	Adjusting entry	Debit	Credit
	Insurance expense	$4,450
	Prepaid insurance ($6000-$1550)		$4,450
b)			Dr or Cr	Prepaid insurance
Step 1	Determine what the current account equals	$7,190	Debit	$7,190
					$1,560
Step 2	Determine what the current account should equal ($7190-$1560)	$5,630	Debit	$5,630
Step 3	Record the December 31, adjusting to get from step 1 and step 2
	Adjusting entry	Debit	Credit
	Insurance expense	$1,560
	Prepaid insurance		$1,560
c)			Dr or Cr	Prepaid rent
Step 1	Determine what the current account equals	$39,600	Debit	$39,600
					$6,600
Step 2	Determine what the current account should equals ($39,600 - $6,600)	$33,000	Debit	$33,000
Step 3	Record the December 31, adjusting to get from step 1 and step 2
	Adjusting entry	Debit	Credit
	Rent expense	$6,600
	Prepaid Rent ($39,000/24 months) × 4 months		$6,600