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13 July, 14:59

On July 1, 2008, Sheeley Company pays $8,000 to its insurance company for a 2-year insurance policy. InstructionsPrepare the necessary journal entries for Sheeley on July 1 and December 31.

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  1. 13 July, 15:45
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    Debit Prepaid insurance $8,000

    Credit Cash account $8,000

    Being entries to recognize prepaid insurance as at July 1, 2008

    Debit Insurance expense $2,000

    Credit Prepaid Insurance $2,000

    Being entries to recognize insurance expense as at December 31.

    Explanation:

    The amount paid by Sheeley Company On July 1, 2008 is a prepayment (an asset) as it is paid in advance. The insurance cover was yet to be enjoyed as at that date.

    Entries required to recognize this payment

    Debit Prepaid insurance $8,000

    Credit Cash account $8,000

    Being entries to recognize prepaid insurance as at July 1, 2008

    As at 31 December, the company would have incurred expenses for 6 months out of the 24 months (2 years) paid for.

    This amounts to

    = 6/24 * $8,000

    = $2,000

    To recognize this by December 31

    Debit Insurance expense $2,000

    Credit Prepaid Insurance $2,000

    Being entries to recognize insurance expense as at December 31.
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