how would i do this question: Kreative Kitchens purchased a 1-year insurance pol
ID: 2460388 • Letter: H
Question
how would i do this question:
Kreative Kitchens purchased a 1-year insurance policy on 1 March 2017. The entrie premium of $9000 was recorded by debiting Prepaid Insurance. Ignore GST.
a. give the adjusting entry at 30 june for the year ending 30 june 2017
b. what amount should be reported in the 30 june 2017 balance sheet for Prepaid insurance?
c. if no adjusting entry were made on june 30, by how much would profit be overstated or understated? would assets be overstated or understated? explain
d. what would your adjusting entry in requirement A be if the premium of $9000 was recorded by debiting Insurance Expenses?
Explanation / Answer
Solution:
a. Adjusting entry at 30 June for the year ending 30 June 2017
Since the year is ending on 30 June 2017, Insurance Expenses for 4 months from March to June (4 Months) should be recognized in the year ended 30 June 2017:
So the Insurance Expenses for 4 Months = $9,000 x 4/12 = $3,000
Adjusting Entry
Insurance Expenses A/c Dr. $3,000
To Prepaid Insurance $3,000
(Being insurance expenses for 4 months recorded)
b. Amount should be reported in the 30 June 2017 balance sheet for Prepaid Insurance = $9,000 – Insurance Expenses already recorded for 4 months during the year ended 30 June 2017
= $9,000 - $3,000 = $6,000
c. If no adjusting entry were made on June 30, the profit be overstated by $3,000 because the Insurance Expenses are would not recorded resulting it will increase the profit by $3,000.
d. the adjustment entry would be:
It means all the expenses are recorded in the year ended June 30, 2017. It is incorrect because only 4 months insurance expenses $3,000 should be recorded in this year and balance $6,000 would be shown as Prepaid Expenses in the balance sheet for the year ending June 30.
Adjustment Entry would be passed as follows:
Prepaid Insurance A/c Dr. $6,000
To Insurance Expenses $6,000
(Being prepaid insurance due in next year is recorded)
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.