Question

Garcia Company had the following selected transactions during the year. (A partial chart of accounts follows:

Cash; Accounts Receivable; Prepaid Insurance; Wages Payable; Unearned Revenue; Revenue;

Wages Expense; Insurance Expense; Depreciation Expense.)

Jan. 1 The company paid \(6,000 cash for 12 months of insurance coverage beginning immediately for

the calendar year.

Aug. 1 The company received \)2,400 cash in advance for 6 months of contracted services beginning

on August 1 and ending on January 31.

Dec. 31 The company prepared any necessary year-end adjusting entries related to insurance coverage

and services rendered.

a. Record journal entries for these transactions assuming Garcia follows the usual practice of recording a

prepayment of an expense in an asset account andrecording a prepayment of revenue received in a

liability account.

b. Record journal entries for these transactions assuming Garcia follows the alternative practice of recording

a prepayment of an expense in an expense account andrecording a prepayment of revenue

received in a revenue account

Short answer

Answer:

Journal entries in the books of Gracia by using the usual practice of recording is shown in step 2.

Step-by-step solution

Definition of prepaid insurance

This amount is known as prepaid insurance when insurance is paid in advance before the due date.

Journal entries

	Journal entry
Date	Particulars	Debit	Credit
January 1	Prepaid Insurance	$6,000
	Cash		$6,000
	(Payment of insurance)
August 1	Cash	$2,400
	Unearned Revenue		$2,400
	(Advance revenue received)
December 31	Insurance Expense	$6,000
	Prepaid Insurance		$6,000
	(Adjustment entry of prepaid insurance)
December 31	Unearned Revenue	$2,000
	Revenue		$2,000
	(Adjustment entry to recognize service revenue)