Question

jay company had no previous balance in their prepaid insurance account when they purchased a one year insurance policy for $6,000 on august 1st. what would be the adjusting entry made on december 31st? hint: assume adjusting entries were not made at the end of each month prior to december 31st.

Answer 1

On December 31st, Jay Company should debit Insurance Expense for $2,500 and credit Prepaid Insurance for $2,500 to reflect the five months of the insurance policy that have been used.

Step-by-step explanation:

On December 31st, Jay Company needs to make an adjusting entry for the prepaid insurance to account for the amount of insurance that has been used up since the policy was purchased on August 1st. Since the prepaid insurance is for one year and costs $6,000, the monthly cost is $500 ($6,000 ÷ 12 months). By December 31st, five months have passed, so the company has used $2,500 of the insurance ($500 × 5 months). The adjusting entry will therefore be a debit to the Insurance Expense account for $2,500 and a credit to the Prepaid Insurance account for $2,500, reflecting the expired portion of the insurance policy.

Answer 2

Jay Company would make an adjusting entry to debit Insurance Expense for $2,500 and credit Prepaid Insurance for $2,500 on December 31st. This accounts for the five months' worth of insurance policy used by the year's end.

Step-by-step explanation:

The student is asking about the adjusting entry for prepaid insurance in accounting. Jay Company purchased a one-year insurance policy for $6,000 on August 1st. Since the policy covers a year, the cost should be spread out evenly over 12 months, equating to $500 per month ($6,000 / 12 months). By December 31st, five months of the policy have passed (August through December), so the company has used $2,500 of the insurance ($500 x 5 months).

The adjusting entry on December 31st will reflect the insurance expense incurred and reduce the prepaid insurance asset accordingly. Here's the entry:

• Debit Insurance Expense: $2,500
• Credit Prepaid Insurance: $2,500

This entry will correctly represent the cost of the insurance that has been used up by the end of the year.