Question

Prepare a journal entry for the following transaction: On December 17, On Your Mark paid $1,500 to Keystone Insurance Company toward the premium for a six-month insurance policy, check No. 1001. *The Account debited is an asset not the name of the Insurance Company.

Answer 1

Answer: Journal Entry shall be:

Prepaid Insurance A/c Dr. $1,500

To Cash A/c $1,500

(Prepaid insurance for upcoming 6 months is paid)

Step-by-step explanation:

As provided the insurance premium is paid on December 17, that is near the closing of the year.

As books are closed on 31 December each year, and insurance premium is for 6 months, thus on date of year end the balance shown is a prepaid insurance expense.

Thus, Entry will be

Prepaid Insurance A/c Dr. $1,500

To Cash A/c $1,500

(Prepaid insurance for upcoming 6 months is paid)

Here, the asset is prepaid insurance, as this relates to upcoming financial year but paid at closing of current year books.