Gizmo Inc. purchased a one-year insurance policy on October 1 for $5,280. The adjusting entry on December 31 would be: (If an amount box does not require an entry, leave it blank.) Dec. 31 Insurance Expense 5,280 Prepaid Insurance 5,280

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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**Insurance Adjustment for Gizmo Inc.**

Gizmo Inc. purchased a one-year insurance policy on October 1 for $5,280. The adjusting entry on December 31 would be as follows: (If an amount box does not require an entry, leave it blank.)

- **Dec. 31:**
  - **Insurance Expense:** $1,320
  - **Prepaid Insurance:** $3,960

**Explanation:**

- **Insurance Expense:** 
  - The insurance expense is calculated for the period from October 1 to December 31, which is three months. 
  - Monthly expense = Total cost / 12 months = $5,280 / 12 = $440 per month.
  - For three months: $440 x 3 = $1,320.

- **Prepaid Insurance:**
  - The remaining balance of prepaid insurance is for the unexpired period (9 months).
  - Prepaid amount = $5,280 (total) - $1,320 (expense) = $3,960.

This adjustment ensures that the expense is properly recorded for the period incurred, while the remaining unexpired portion remains as a prepaid asset.
Transcribed Image Text:**Insurance Adjustment for Gizmo Inc.** Gizmo Inc. purchased a one-year insurance policy on October 1 for $5,280. The adjusting entry on December 31 would be as follows: (If an amount box does not require an entry, leave it blank.) - **Dec. 31:** - **Insurance Expense:** $1,320 - **Prepaid Insurance:** $3,960 **Explanation:** - **Insurance Expense:** - The insurance expense is calculated for the period from October 1 to December 31, which is three months. - Monthly expense = Total cost / 12 months = $5,280 / 12 = $440 per month. - For three months: $440 x 3 = $1,320. - **Prepaid Insurance:** - The remaining balance of prepaid insurance is for the unexpired period (9 months). - Prepaid amount = $5,280 (total) - $1,320 (expense) = $3,960. This adjustment ensures that the expense is properly recorded for the period incurred, while the remaining unexpired portion remains as a prepaid asset.
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