Final answer:
The July 4 Company would record the purchase of a one-year insurance policy by debiting Prepaid Insurance and crediting Cash for $6,000. This reflects the prepayment of the insurance asset and the reduction in cash.
Step-by-step explanation:
When July 4 Company pays $6,000 for a one-year insurance policy, an initial entry is made to record the payment and establish a prepaid expense. Since the insurance coverage lasts for one year, the cost of the policy needs to be allocated over the coverage period. Thus, this transaction should be recorded in two accounts: Cash and Prepaid Insurance.
The journal entry to record the payment would be:
Debit Prepaid Insurance $6,000
Credit Cash $6,000
This entry reflects the reduction in cash and records the prepaid insurance as an asset on the company's balance sheet. As the insurance policy benefits the company over the coverage period, the amount will be expensed gradually through monthly adjusting entries.
July 4 Company pays $6,000 for a one-year insurance policy that will expire next year on June 30. What would be the entry in Journal.