Question

n July 1, 2017, Sheridan Company pays $12,500 to Oriole Company for a 2-year insurance contract. Both companies have fiscal years ending December 31. Collapse question part (a) For Sheridan Company, journalize the entry on July 1 and adjusting entry on December 31. (Record journal entries in the order presented in the problem. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Answer 1

Step-by-step explanation:

The journal entries are shown below:

July 1: Prepaid insurance A/c Dr $12,500

To Cash A/c $12,500

(Being advance insurance is paid in cash)

July 31: Insurance expense A/c $3,125

To Prepaid insurance $3,125

(Being adjusted entry made)

The calculation of insurance expense is shown below:

= (Insurance ÷ total number of months in a two year ) × number of months

= ($12,500 ÷ 24 months) × 6 months

= $3,125

Answer 2

Sheridan Company records:

July 1st

`\begin{array}{ccc}Account&Debit&Credit\\$Prepaid Insurnace&12,500&\\$Cash&&12,500\\\end{array}`

December 31st adjusting entry

`\begin{array}{ccc}Account&Debit&Credit\\$Insurance Expense&3,125&\\$Prepaid Insurance&&3,125\\\end{array}`

At first, the company will record the insurance as an asset because, they adquire the right to get insurance. Therefore, as time past, they will decrease it as the insurance expires a portion each month.

12,500 for 2 years

12,500 / 24 months = 520.83 per month

6 month = 3,125 expired amount.