Question

On december 31, carmack company's prepaid insurance account had a balance before adjustment of $6,000. the insurance was purchased on july 1 of the same year for one year of insurance coverage, with coverage beginning on that date. the adjusting entry needed on december 31 is:

Answer 1

Adjusting entry for Insurance Expense:

In the given case, the insurance was purchased on July 1 of the same year for one year of insurance coverage, with coverage beginning on that date. It means the Insurance expense for the current year shall be calculated for the period (July 1 to Dec. 31) =6 Months

The Total amount paid for one year was $6,000. So the amount of expense for the current year shall be 6000*6/12 = $3,000

Hence the adjustment entry shall be made for $3,000 Insurance expense. We shall debit Insurance expense and Credit the Prepaid Insurance. The

Adjusting Journal entry as on Dec. 31 shall be as follows:

Insurance Expense Debit $3,000

Prepaid Insurance Credit $3,000