Question

On January 1, 2015, Genesis limited signed up for an Insurance package. The annual charge is $1,500,000 payable in equal amounts at the beginning of each quarter. Electricity expense for the year amounts to $900,000 and is to be paid in three equal amounts throughout the year. Analysis of the company's records indicated that the following payments were made: Insurance Payments Electricity Payments January 2, 2015- $375,000 cash January 5, 2015 $300,000 cash April 3, 2015- $375,000 cash May 3, 2015- $300,000 cash July 8, 2015- $375,000 cash Sept 6, 2015- $600,000 cash January 25, 2016- $750,000 cash If you were the accountant for Genesis Limited, how would you record this information in the Insurance and Electricity Account? Briefly explain the debit and credit entries that you made.

A) Debit Insurance Expense and Credit Cash; Debit Electricity Expense and Credit Cash.
B) Debit Insurance Expense and Credit Accounts Payable; Debit Electricity Expense and Credit Accounts Payable.
C) Debit Prepaid Insurance and Credit Cash; Debit Prepaid Electricity and Credit Cash.
D) Debit Insurance Expense and Credit Cash; Debit Prepaid Electricity and Credit Cash.

Answer 1

Genesis Limited's financial records for insurance and electricity should be recorded as prepaid expenses until they are incurred. Insurance payments are debited to Prepaid Insurance, and electricity payments are debited to Prepaid Electricity with the corresponding credits to Cash.

Step-by-step explanation:

The correct entry for Genesis Limited's financial records, considering the insurance is paid in advance, is option C) Debit Prepaid Insurance and Credit Cash; Debit Prepaid Electricity and Credit Cash. Insurance payments should be recorded as prepaid insurance because the payment provides a benefit over the course of the year. Similarly, payments toward electricity, though not typically prepaid, would in this case be treated as prepaid electricity since the cash is paid out before the full expense is incurred over the respective periods.

The entries for the insurance would look like this for Genesis Limited:

• Debit Prepaid Insurance $375,000
• Credit Cash $375,000

And for each of the first two electricity payments:

• Debit Prepaid Electricity $300,000
• Credit Cash $300,000

In the case of electricity, the final payment of $600,000 is double the expected triannual payment, indicating that part of it may be prepaying for the next period or settling any outstanding payable from the previous year.

These entries reflect a professional, accurate, and friendly assistance to students who are trying to understand how to record insurance and electricity payments in financial accounts.