On November 1, Year 1, Key Co. paid $3,600 to renew its now-expired insurance policy for 3 years. It recorded this payment as an expense. At December 31, Year 1, Key's unadjusted trial balance showed a balance of $90 for prepaid insurance and $4,410 for insurance expense. What amounts should be reported for prepaid insurance and insurance expense in Key's December 31, Year 1, financial statements?

Prepaid Insurance 3,490

Insurance Expense 1010

Explanation:

November 1, Year 1,

Insurance Expense recorded = $3,600

Unadjusted balances:

Insurance Expense = $4,410

Prepaid Insurance = $90

* Assuming prepaid of $90 is from other insurance policy of $900 for 10 months and it has only one month to expired 9 moths charged as 810 (9 x 90).

Actual Prepaid balance = $90 + (3600 x 34/36) = 90 + 3400 = 3,490

Actual Insurance Expense = 4,410 - 3400 = 1010

Prepaid insurance: $3,400

Insurance expense: $1,100

Explanation:

Since Key Co. paid $3,600 to renew its policy for 3 three years, it means that the cost per month = $3,600 / 36 months = $100

So during year 1 it has to record two months worth of insurance or $200, that means that the prepaid insurance account should decrease by $200 = $3,600 - $200 = $3,400.

The actual amount of insurance expense = $4,410 + $90 (prepaid insurance not previously expensed) - $3,400 (prepaid insurance balance) = $1,100