Question

Please help with creating journal entries for the following

ABC Corp.

Balance Sheet

As of December 31, 2006

Assets				Liability
Cash		$6,000		Accounts Payable		$3,000
Accounts Receivable		$4,000
				Stockholders' Equity
				Common Stock		$3,000
				Additional Paid-in Capital		$2,000
				Retained Earnings		$2,000
				Total Liability and Stockholders' Equity
Total Assets		$10,000				$10,000

Below is a summary of events experienced by ABC Corp. during 2007

1. On Jan 1^st, 2007, ABC Corp. purchased equipments for $800. The equipment has a useful life of four years and ABC Corp. use straight-line depreciation.
2. On April 1^st, 2007, ABC purchased a one-year insurance policy for $1200. The policy is effective immediately.
3. ABC Corp. declared and paid cash dividends of $1,000.

Answer 1

	Date	Particulars	Debit	Credit
A	01 January 2007	Equipments	800.00
		Cash		800.00
B	01 April 2007	Insurance expense	1,200.00
		Cash		1,200.00
C	31 December 2007	Retained earnings	1,000.00
		Dividends payable		1,000.00
		(journal entry for dividends declared)
D	31 December 2007	Dividends payable	1,000.00
		Cash		1,000.00
		(journal entry for dividends paid)
E	31 December 2007	Depreciation	200.00
		Accumulated depreciation		200.00
		($800/4 years = $200 per year)
F	31 December 2007	Prepaid insurance	300.00
		Insurance expense		300.00
		(adjusting entry)

Explanations: The insurance amount of $1200 is for 12 months and so monthly expenses = 1200/12 = $100 per month.

Expenses that should be recorded in books, as per accrual accounting system, should be =  expenses for the period 1st April to 31st December i.e. a period of nine months. The amount will be = 9 months*$100 per month = $900. The remaining amount of 1200-900 = 300 will be recognized as prepaid insurance expense and will stand as a current asset in balance sheet.