Question

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 \(4,700 debit balance to start the year.

A review of insurance policies and payments shows that \)900 of unexpired insurance remains at

year-end.

b. Prepaid Insurance. The Prepaid Insurance account had a \(5,890 debit balance at the start of

the year. A review of insurance policies and payments shows \)1,040 of insurance has expired by

year-end.

c. Prepaid Rent. On September 1 of the current year, the company prepaid \(24,000 for two years of rent for facilities being occupied that day. The company debited Prepaid Rent and credited Cash for

\)24,000.

Short answer

Insurance expense account debit and preapaid insurance expense credit with $1,040.

Step-by-step solution

Definition of prepaid insurance

Prepaid insurance is the amount that is paid before the due date.

Current account balance

The current account balance equals $5,890

Current account balance should be

The current account should equal $4,850

Adjusting entry

	Journal entry
Date	Particulars	Debit	Credit
December 31	Insurance expense	$1,040
	Prepaid insurance expense		$1,040
	(Adjusting entry of prepaid insurance)

$$\begin{gathered} \mathbf{PrepaidInsurance}\mathbf{=}\mathbf{CurrentAccountBalance}\mathbf{-}\mathbf{CurrentAccountBalanceShouldbe} \\ \mathbf{=}\mathbf{\$}\mathbf{5}\mathbf{,}\mathbf{890}\mathbf{-}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{850} \\ \mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{040} \end{gathered}$$