Question

On January 1, Prepaid Insurance was debited for $2,400 related to the cost of a two-year premium with coverage beginning immediately. How should this account be adjusted and what other account is adjusted on January 31 before financial statements are prepared for the current month? What type of account is Prepaid Insurance? What financial statement will Prepaid Insurance appear on and what will be the balance on January 31st?

Answer 1

Prepaid insurance is a unexpired cost that has been paid in advance for future period. It should be classified as a current asset.

Entry when prepaid insurance is purchased on January 1,

Date	Accounts title	Debit	Credit
Jan 1	Prepaid insurance	$2,400
	Cash		$2,400

   [ To record the payment of insurance premium in advance ]

In the given date, Insurance premium was purchased for 2 years beginning from jan 1. Generally, Expired cost of insurance premium is expensed at the end of accounting period which is January 31st in the current case.

Entry on jan 31st

Date	Accounts title	Debit	Credit
jan 31	Insurance expense	$100
	Prepaid insurance		$100

   [ to record the insurance expense]

calculation : For 2 years = $2,400

   For 1 month = 2,400/24 =$100. This expense is transferred to income statement.

Prepaid insurance is current asset .account.

It will appear on balance sheet under current asset group.

Prepaid insurance balance on jan 31st = $2400 - $100 = $2,300