For each separate case below, follow the three-step process for adjusting the pr

Question

For each separate case below, follow the three-step process for adjusting the prepaid asset account at December 31 Step 1: Determine what the current account balance equals. Step 2: Determine what the current account balance should equal. Step 3: Record the December 31 adjusting entry to get from step 1 to step 2. Assume no other adjusting entries are made during the year a. Prepaid Insurance. The Prepaid Insurance account has a $4,900 debit balance to start the year. A review of insurance policies and payments shows that $1,000 of unexpired insurance remains at year-end Prepaid Insurance Step 1: Determine what the current account balance equals Step 2: Determine what the current account balance should equal. Step 3: Record the December 31, adjusting entry to get from step 1 to step 2.

Explanation / Answer

a) Step 1 - The current prepaid insurance account balance equals to $4,900

Step 2 - The current prepaid insurance account balance should equal $1,000 at the year end (Since that is the amount of unexpired insurance remaining at the year end)

Step 3 - Adjusting entry - Prepaid Insurance has a debit balance of $4,900 which needs to be brought down to $1,000. Hence, prepaid insurance account will be credited by $3,900 and insurance expense account (because it is an expense) will be debited by the same amount. Entry:

b) Step 1 - The current prepaid insurance account balance equals to $6,090

Step 2 - The current prepaid insurance account balance should equal $4,970 (6090-1120) at the year end (Since $1,120 worth of insurance has expired during the year, it does not continue to be an asset for the company, it should no further be included in prepaid insurance account)

Step 3 - Adjusting entry - The isnurance expense incuured during the year is $1,120. Hence, insurance expense account will be dedited by $1,120 and prepaid insurance account will be credited by the same amount. Entry:

c) Step 1 - The current prepaid rent account balance equals to $26,400 (Since, the company has already debited prepaid rent by that much amount)

Step 2 - The current prepaid insurance account balance should equal $22,000 [26,400 * (24 months - 4 months) / 24 months] at the year end (Since the company has paid rent for a total period of 24 months of which only 4 months - September to December belong to the current period and rent for 20 months is paid in advance)

Step 3 - Adjusting entry - Prepaid Insurance has a debit balance of $26,400 which needs to be brought down to $22,000. Hence, prepaid rent account will be credited by $4,400 and rent account will be debited by the same amount (The amount of expense to be debited to rent account can also be calculated as 26400 * 4 months / 24 months since the rent for the current financial year will include only 4 month's rent, i.e. September to December). Entry:

Insurance Expense A/c Dr. $3,900 To Prepaid Insurance A/c $3,900

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