Question

A firm neglected to record any journal entries during the current accounting year, related to their only insurance policy. After the beginning of the period, January 1st, there was $750 of current “prepaid fire insurance” on the balance sheet. On June 30th, the firm paid $2,000 to renew the fire insurance policy for a further 12 months. The firm’s fiscal year ends on December 31st.

Answer 1

A firm neglected to record any journal entries during the current accounting year, related to their only insurance policy. After the beginning of the period, January 1st, there was $750 of current “prepaid fire insurance” on the balance sheet. On June 30th, the firm paid $2,000 to renew the fire insurance policy for a further 12 months. The firm’s fiscal year ends on December 31st.

On Dec 31 company recognize the insurance expenses for the 12 month period, and beyond the expenses, it will record adjusting entry for prepaid expenses.

Here the beginning balance in prepaid insurance was recognized 6 month period insurance expenses.

On June 30^th the firm paid $2000 to renew the insurance, and the thing is, it is not recorded.

And the $2000 is for 12 month period starting July 1^st to next year June 30^th, so the half of $2000 for is current year insurance expenses.

Current period insurance expenses = 750 + 1000 ( half of the $2000 ) = $1750

And half of the $2000 is the next year insurance, so it should recorded as prepaid insurance, because it is advance payment.

Through the compound Adjusting entry is:-

Date	account and explanation	Debit	Credit
Dec 31	Insurance expense	$1750
	Prepaid insurance	$1000
	Prepaid insurance		$750
	Cash		$2000
	(recognize current period insurance expenses )		.

Single wise:-

First recognize the first 6 month insurance expenses

Date	account and explanation	Debit	Credit
Dec 31	Insurance expense	$750
	Prepaid insurance		$750

Next record entry for ommitted transaction.as adjusting

Date	account and explanation	Debit	Credit
Dec 31	Insurance expense	$1000
	Prepaid insurance	$1000
	Cash		$2000