Question

On July 1, 2019, Blossom Co. pays $19,300 to Sunland Insurance Co. for a 4-year insurance contract. Both companies have fiscal years ending December 31. For Blossom Co., journalize and post the entry on July 1 and the adjusting entry on December 31. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Record journal entries in the order presented in the problem. Round answers to 0 decimal places, e.g. 5,275.)

Date Account Titles and Explanation Debit Credit

Prepaid Insurance

Insurance Expense

Answer 1

In the books of Blossom Co

Journal Entries

Date	Accounts title and explanation	Debit($)	Credit($)
July 1,2019	Prepaid Insurance	19,300
	Cash		19,300
	[Insurance expense prepaid for 48 months ]
December 31, 2019	Insurance Expense [19,300 X 6/48]	2,412.50
	Prepaid Insurance		2,412.50
	[Prepaid Insurance exhausted for 6 months ]

Note : Total insurance premium paid for 4 years i. e 4 X 12 = 48 months .

Total insurance premium paid on July 1, 2019 = $ 19,300

Fiscal year ended on 31st December 2019. So, in the first fiscal year only six months insurance premium has been exhausted ( July to December).  

So, total insurance expense debited on 31st December 2019 and prepaid insurance credited as exhausted during that period as per accrual basis of accounting amounted to , $ 19,300 X 6/48 = $ 2,412.50

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