Question

On July 1, Lopez Company paid $1,200 for six months of insurance coverage. No adjustments have been made to the Prepaid Insurance account, and it is now December 31. b. Zim Company has a Supplies account balance of $5,000 at the beginning of the year. During the year, it purchased $2,000 of supplies. As of December 31, a physical count of supplies shows $800 of supplies available. Prepare the year-end adjusting entries to reflect expiration of the insurance and correctly report the balance of the Supplies account and the Supplies Expense account as of December 31.

Record year-end adjusting entry to reflect expiration of the insurance as of December 31.

Answer 1

The adjusting entries required at the year-end involve expensing the full insurance premium for Lopez Company and adjusting the Supplies account for Zim Company to reflect actual supplies on hand, ensuring accurate reporting of expenses and end-of-period profits or losses.

Step-by-step explanation:

Insurance Adjustment: Lopez Company paid $1,200 for six months of insurance coverage starting on July 1st. By December 31st, six months have passed, so the entire insurance amount should be expensed. The adjusting entry debits Insurance Expense and credits Prepaid Insurance by $1,200.

Supplies Adjustment: Zim Company began with a $5,000 balance in the Supplies account and purchased an additional $2,000 during the year. A physical inventory indicated that there are $800 worth of supplies available at year-end. Therefore, $6,200 (beginning balance plus purchases) minus $800 (ending inventory) equals $5,400 to be reported as Supplies Expense. The entry would debit Supplies Expense and credit Supplies for $5,400.

These entries ensure that expenses are matched with the period in which they are incurred, in accordance with the matching principle in accounting, ensuring that the profits or losses are accurately reported.