Question

Mouse Inc. uses the alternative method of accounting for prepayments and purchased a $1,200, 6-month insurance policy. The company immediately debited the Insurance expense account. By the end of the period, $400 of the policy had expired. Demonstrate the required adjustment needed at the end of the period.

Answer 1

Step-by-step explanation:

The adjusting journal entry to record the given adjustment is shown below:

At the year-end

Insurance expense A/c Dr. A/c $800

To Prepaid Insurance A/c $800

(Being insurance expense is recorded)

The computation is given below:

= Prepayment done for 6 months insurance policy - expired insurance

= $1,200 - $400

= $800

Answer 2

At the end of the accounting period, it will need to recognize the 400 prepaid insurance which, are an asset

So, prepaid expense will be debited and the insurance expense credited by the unexpired amount:

Total insurance: $1,200

Expired insurance: $ 400

Unexpired insurance: $ 800

adjusting enty required

Prepaid Insurance 800 debit

insurance expense 800 credit