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23 May, 11:09

On July 1, 2020, Cheyenne Corp. pays $21,900 to Kalter Insurance Co. for a 3-year insurance contract. Both companies have fiscal years ending December 31. For Cheyenne Corp., journalize and post the entry on July 1 and the annual adjusting entry on December 31.

For Cheyenne Corp., journalize and post the entry on July 1 and the adjusting entry on December 31.

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  1. 23 May, 13:59
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    Journalize and post the entry on July 1:

    Debit Prepaid Insurance $21,900

    Credit Cash $21,900

    The annual adjusting entry on December 31:

    On December 31, 2020:

    Debit Insurance Expense $3,650

    Credits Prepaid Insurance $3,650

    On December 31, 2021:

    Debit Insurance Expense $7,300

    Credits Prepaid Insurance $7,300

    On December 31, 2022:

    Debit Insurance Expense $7,300

    Credits Prepaid Insurance $7,300

    On December 31, 2023:

    Debit Insurance Expense $3,650

    Credits Prepaid Insurance $3,650

    Explanation:

    On July 1, 2020, Cheyenne Corp. pays $21,900 in advance for 3 year insurance contract. The company records the insurance as the prepaid Insurance:

    Debit Prepaid Insurance $21,900

    Credit Cash $21,900

    Insurance expense per year = $21,900/3 = $7,300

    On December 31, 2020 the last day of the following 6 months, the company records an adjusting entry:

    Debit Insurance Expense $3,650 (=$7,300/12x6 = $3,650)

    Credits Prepaid Insurance $3,650

    On December 31, 2021:

    Debit Insurance Expense $7,300

    Credits Prepaid Insurance $7,300

    On December 31, 2022:

    Debit Insurance Expense $7,300

    Credits Prepaid Insurance $7,300

    On December 31, 2023:

    Debit Insurance Expense $3,650

    Credits Prepaid Insurance $3,650
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