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Taylor Company has a December 31 year end. Adjusting journal entries are made at year end...

Taylor Company has a December 31 year end. Adjusting journal entries are made at year end (rather than monthly). Taylor Co. purchased a $1,000,000 twelve month insurance policy on August 1, 2019. Coverage begins on August 1, 2019. The annual premium is $12,000. Taylor Co. paid $1,000 on August 1 and $11,000 on September 1. Prepare the journal entries on August 1, 2019, September 1, 2019, and December 31, 2019.

Debit                        credit

Aug 1 2019 prepaid insurance                                  1000

                                         Cash                                                                      1000

Sep 1 2019    prepaid insurance                                 11000   

                                          Cash                                                                      11000

Dec 31 2019 insurance expense                                  5000

                                       Prepaid insurance                                                        5000                               

                                     12000x 5/12

Refer to question 1. Assume that this insurance policy is the only insurance policy Taylor Co. has purchased. What is the balance in prepaid insurance following the August 1, September 1 and December 31 journal entries?

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Answer #1

Annual premium = $12,000

$1,000 premium was paid on August 1 and $11,000 premium was paid on September 1.

Prepaid insurance on August 1 = $1,000

Prepaid insurance on September 1 = $12,000

Prepaid insurance on December 31 = Prepaid insurance - Insurance expense for 5 months

= 12,000 - 5,000

= $7,000

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