Question

As of December 31, Plush has not recorded any insurance expense for the year. The only insurance policy it owns is the one purchased on July 10, a three year insurance policy for $72,000 starting on August 1st. Make a general journal entry.

Answer 1

Debit Insurance expense $10,000

Credit Prepaid Insurance $10,000

Being entries to recognize insurance expense for the period (August to December).

Step-by-step explanation:

Given;

Insurance policy was purchased on July 10 to run for 3 years.

Cost of policy = $72,000

Start date is August 1st. As at 31 December, the policy should have been amortized for 5 months (August to December)

Monthly depreciation = $72,000/(3 × 12)

= $2,000

Total amortization between August and December = 5 × $2,000

= $10,000

Journal entries

Debit Insurance expense $10,000

Credit Prepaid Insurance $10,000

Being entries to recognize insurance expense for the period (August to December).