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Smokey Company purchases a one-year insurance policy on July 1 for $3,600. The adjusting entry on...

Question:

Smokey Company purchases a one-year insurance policy on July 1 for $3,600. The adjusting entry on December 31 is

a) debit Insurance Expense, $1,500; credit Prepaid Insurance, $1,500

b) debit Insurance Expense, $2,100; credit Prepaid Insurance, $2,100

c) debit Prepaid Insurance, $1,800; credit Cash, $1,800

d) debit Insurance Expense, $1,800; credit Prepaid Insurance, $1,800

Adjusting entries:

The entries that are required to be passed at the end of the accounting period, after the first trial is prepared is called the adjusting entries. The matching principle of accounting states that all expenses and revenues are to be shown in the accounting period irrespective of the actual sum received or paid. The prepaid expenses and unearned income are adjusted at the end of the accounting period.

Answer and Explanation:

The company paid insurance expenses of $3,600 starting from July 1 to next year June 30 on July 1

The journal entry on July will be

  • Debit prepaid expense, 3,600 and credit cash, $3,600

As per matching concept the insurance expense has to be booked from July 1 to December 31 for 6 months as the accounting period ends on December 31

Insurance expense = $3,600 x (6 months / 12 months)

=$3,600 / 2

=$1,800

The adjusting entry on December 31 is debit Insurance Expense, $1,800; credit Prepaid Insurance, $1,800 and the answer is "d"


Learn more about this topic:

Prepaid Expenses in Accounting: Definition & Examples
Prepaid Expenses in Accounting: Definition & Examples

from Financial Accounting: Homework Help Resource

Chapter 1 / Lesson 17
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