Question

A firm purchased a three-year insurance policy for $5,760 on July 1, 2019. The $5,760 was debited to the Prepaid Insurance 2. On December 1, 2019, a firm signed a contract with a local radio station for advertising that will extend over a two-year period. The account. firm paid $27,840 in advance and debited the amount to Prepaid Advertising Prepare end-of-month adjusting entries for each of the above situations.

Answer 1

The journal entries are as follows:

(i) Insurance expense A/c Dr. $160

To prepaid insurance $160

(To record the insurance expense)

Workings:

Insurance expense = cost of insurance policy ÷ 36 months

= $5,760 ÷ 36 months

= $160

(ii) Advertising expense A/c Dr. $1,160

To prepaid advertising $1,160

(To record the advertising expense)

Workings:

Advertising expense = cost of advertisement ÷ 24 months

= $27,840 ÷ 24 months

= $1,160