Question

Calculator A one-year insurance policy was purchased on June 1 for $2,400. The adjusting entry on December 31 would be: (If an amount box does not require an entry, leave it blank.) Dec. 31

Answer 1

Insurance Expense refers to the expired premium paid by a business to an insurer. An insurer or insurance company undertakes specific risks thereby protecting the business from possible losses.

Classification and Presentation of Insurance Expense
Insurance Expense is part of operating expenses in the income statement.The amount paid to acquire a specific coverage is known as "premium".
Insurance agreements last for a certain period of time. Only the expired portion of the premium should be presented as "Insurance Expense". The unexpired part is presented as "Prepaid Insurance", an asset.

AS PAR THIS EXPLANATION
JOURNAL ENTRY WHEN BUSINESS PURCHASE AN INSURANCE POLICY on JUNE 1
prepaid insurance a/c dr. $2400
to cash a/c $2400
(being insurance policy puchased for one year)

ADJUSTED JOURNAL ENTRY ON 31 DEC.
Upon the expiration of the contract or a part of it, the entry to transfer "Prepaid Insurance" to "Insurance Expense" would be:
INSURACE EXPENSE A/C DR. $1400#
TO PREPAID INSURANCE A/C $1400


# $2400/12*7 = $1400