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8 December, 15:01

On December 31, 2018, the unadjusted balance in Prepaid Insurance was $2580. This was the amount paid in the middle of the year for a two-year insurance policy with coverage beginning on July 1, 2018. The unadjusted balance in Insurance Expense was $390, which was the cost of insurance from January 1 to June 30, 2018.

What is the adjusted journal entry for both insurance expense and prepaid insurance?

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  1. 8 December, 18:38
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    Debit Insurance expense $665

    Credit Prepaid Insurance $665

    Being entries to recognize insurance expense incurred between July and December, 2018

    Explanation:

    When an amount is prepaid for insurance expense to be incurred at a later date, the entries required are

    Debit Prepaid insurance account

    Credit Cash account

    When the expense is incurred, the entries then required will be

    Debit Insurance expense

    Credit Prepaid Insurance

    Since the $2,580 paid was for a two-year insurance policy with coverage beginning on July 1, 2018, at at December 31, 2018, the expense would have been incurred for 6 months out of the 24 months (2 years) paid for. This expense amounts to

    = 6/24 * $2,580

    = $665

    Hence the adjustment required

    Debit Insurance expense $665

    Credit Prepaid Insurance $665

    Being entries to recognize insurance expense incurred between July and December, 2018
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