Question

A company has a fiscal year-end of December 31: (1) on October 1, $21,000 was paid for a one-year fire insurance policy; (2) on June 30 the company lent its chief financial officer $19,000; principal and interest at 5% are due in one year; and (3) equipment costing $69,000 was purchased at the beginning of the year for cash. Depreciation on the equipment is $13,800 per year. Prepare the necessary adjusting entries at December 31 for each of the above items.

Answer 1

Step-by-step explanation:

1. Insurance expense A/c Dr $5,250

To Prepaid Insurance $5,250

(Being prepaid insurance is adjusted)

2. Accrued interest A/c Dr $475

To Interest payable $475

(Being accrued interest is payable)

3. Depreciation expense - equipment A/c Dr $13,800

To Accumulated depreciation - equipment $13,800

The computation of the prepaid insurance and accrued interest is shown below:

Prepaid insurance = Insurance amount × (number of months ÷ total number of months in a year)

= $21,000 × (3 months ÷ 12 months)

= $5,750

The 3 months is computed from October 1 to December 31

Accrued interest = Principal × rate of months × (number of months ÷ total number of months in a year)

= $19,000 × 5% × (6 months ÷ 12 months)

= $475

The 6 months is computed from June 30 to December 31