Hi. This question messes up with my head,
Company A paid $24,000 for a 2-year property insurance policy on April 1, Year 1, the effective date of the policy. On April 1, Year 3, the company renewed the policy for an additional 2-year period for $36,000. Under Company A's accounting system, all insurance premiums paid are recognized (debited) as insurance expense. The only journal entry that was recorded during Year 3 regarding the property insurance was the payment of the premium for the renewal of the policy.
prepare Company A's year-end adjusting entries required for the correct presentation of the December 31, Year 3, financial statements.
Answer: The unadjusted trial balance on December 31, Year 3, should reflect insurance expense and prepaid insurance expense of $36,000 and $3,000 [($24,000 ร (3 รท 24)], respectively. The correct amount of Year 3 insurance expense is $16,500 [($1,000 ร 3 for the first 3 months of Year 3) + ($1,500 ร 9 for the last 9 months of Year 3)]. The correct amount of December 31, Year 3, prepaid insurance expense is $22,500 [($36,000 ร (15 รท 24)]. Thus, the year-end adjusting journal entry is to increase (debit) prepaid insurance expense by $19,500 ($22,500 โ $3,000) and decrease (credit) the insurance expense unadjusted balance by $19,500 ($36,000 โ $16,500).
Uhm, if i do T accounts for prepaid insurance at Dec 31, Yr 3, it should have starting balance of $3000(leftover from first insurance) and DR 36000 new policy purchase. On the credit side i will have 3 months @ 1000 and 9 @1500, so my ending will be $22500. Initially prepaid insurance had $0 balance (per company policy), so adj entry for prepaid should be dr 22500? What am i missing???
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