Final Answer:
P&G initially paid $720,000 for 2 years of insurance on February 1, recording it as Prepaid Insurance. By June 30, 5 months had passed, so they adjusted their books: recognizing $60,000 as Insurance Expense for that period and reducing the Prepaid Insurance by the same amount.
Step-by-step explanation:
Here's how the journal entries would look for both February 1 and the annual adjusting entry on June 30:
February 1:
When P&G pays $720,000 in advance for 2 years of insurance coverage on February 1:
Debit: Prepaid Insurance - $720,000
Credit: Cash or Bank Account - $720,000
June 30 (Adjusting Entry for 5 Months Passed):
Since 5 months have passed from February 1 to June 30, half of the insurance has expired (as it's a 2-year coverage):
Debit: Insurance Expense (Income Statement) - $60,000 (720,000 / 24 months * 5 months)
Credit: Prepaid Insurance - $60,000
This entry recognizes the insurance expense for the portion that has been used up or expired (5 out of the 24 months) and reduces the Prepaid Insurance accordingly to reflect the portion of insurance that remains prepaid.
Your full question was
Assume that on February 1, Procter & Gamble (P&G) paid $720,000 in advance for 2 years' insurance coverage. Prepare P&G's February 1 journal entry and the annual adjusting entry on June 30.