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Reviewing insurance policies revealed that a single policy was purchased on August 1, for one year’s coverage, in the amount of $6,000. There was no previous balance in the Prepaid Insurance account at that time. Based on the information provided: A. Make the December 31 adjusting journal entry to bring the balances to correct. If an amount box does not require an entry, leave it blank. B. Show the impact that these transactions had. If an amount box does not require an entry, leave it blank.

Reviewing insurance policies revealed that a single policy was purchased on August 1, for one year’s coverage, in the amount of $6,000. There was no previous balance in the Prepaid Insurance account at that time. Based on the information provided: A. Make the December 31 adjusting journal entry to bring the balances to correct. If an amount box does not require an entry, leave it blank. B. Show the impact that these transactions had. If an amount box does not require an entry, leave it blank.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Reviewing insurance policies revealed that a single policy was purchased on August 1, for one year’s coverage, in the amount of $6,000. There was no previous balance in the Prepaid Insurance account at that time. Based on the information provided:

A. Make the December 31 adjusting journal entry to bring the balances to correct. If an amount box does not require an entry, leave it blank.

B. Show the impact that these transactions had. If an amount box does not require an entry, leave it blank.

# Understanding Insurance Adjustments and Prepaid Insurance Accounting ## Insurance Policy Review and Journal Entry Adjustments Insurance policies need periodic review to ensure that accounting records align with the fiscal realities. In this scenario, a single insurance policy was purchased on August 1 for a year’s coverage, costing $6,000. Initially, there was no prior balance in the Prepaid Insurance account. ### A. Journal Entry for Adjustments To correctly adjust the balances as of December 31, an evaluation of time elapsed and coverage remaining is crucial. #### Steps for Adjustment - **Date:** Record the entry on Dec. 31. - **Adjusting Entry:** Calculate the expense incurred and update the journal accordingly. This involves debiting the insurance expense and crediting prepaid insurance for the coverage consumed. ### B. Transactions and Their Impacts Understanding the effect of these transactions is essential for accurate financial reporting. Below is a breakdown of the Prepaid Insurance calculations: - **Beginning Balance:** This would be $0, as indicated. - **Premium Paid:** Total premium paid was $6,000. - **Subtotal:** This includes any additions or previous balance, totaling $6,000. - **Expired:** Calculate the portion of the insurance that has expired by December 31. Since the policy started on August 1, five months have passed by December 31. - Monthly Premium: $6,000 / 12 months = $500 - Expired Amount: $500 x 5 months = $2,500 - **Prepaid/Unexpired:** This reflects the remaining balance of the insurance. - Prepaid Insurance Remaining: $6,000 - $2,500 = $3,500 This detailed breakdown helps in maintaining transparency and accuracy in accounting for insurance costs and their related adjustments over time.
Transcribed Image Text:# Understanding Insurance Adjustments and Prepaid Insurance Accounting ## Insurance Policy Review and Journal Entry Adjustments Insurance policies need periodic review to ensure that accounting records align with the fiscal realities. In this scenario, a single insurance policy was purchased on August 1 for a year’s coverage, costing $6,000. Initially, there was no prior balance in the Prepaid Insurance account. ### A. Journal Entry for Adjustments To correctly adjust the balances as of December 31, an evaluation of time elapsed and coverage remaining is crucial. #### Steps for Adjustment - **Date:** Record the entry on Dec. 31. - **Adjusting Entry:** Calculate the expense incurred and update the journal accordingly. This involves debiting the insurance expense and crediting prepaid insurance for the coverage consumed. ### B. Transactions and Their Impacts Understanding the effect of these transactions is essential for accurate financial reporting. Below is a breakdown of the Prepaid Insurance calculations: - **Beginning Balance:** This would be $0, as indicated. - **Premium Paid:** Total premium paid was $6,000. - **Subtotal:** This includes any additions or previous balance, totaling $6,000. - **Expired:** Calculate the portion of the insurance that has expired by December 31. Since the policy started on August 1, five months have passed by December 31. - Monthly Premium: $6,000 / 12 months = $500 - Expired Amount: $500 x 5 months = $2,500 - **Prepaid/Unexpired:** This reflects the remaining balance of the insurance. - Prepaid Insurance Remaining: $6,000 - $2,500 = $3,500 This detailed breakdown helps in maintaining transparency and accuracy in accounting for insurance costs and their related adjustments over time.
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