Accounting 101: Adjusting Entry?

Question

What is the adjusting entry for prepaid insurance that was purchased on June 1 for, 2006 for 6,000 and it is now Dec. 2008?

I think its Insurance Expense 6000 dr.

and Prepaid Insurance 6000 cr. but not sure.

Answer 1

If you purchased it on June 1, 2006, it would have fully expired on May 31, 2007. There should be nothing left of this policy for 2008.

On Dec 31, 2006, 7 mths would have expired, so you would have:

Dr  Insurance expense $3,500

Cr  Prepaid insurance $3,500

On Dec 31, 2007, the remaining 5 mths would have expired, so you would have:

Dr  Insurance expense $2,500

Cr  Prepaid insurance $2,500,

afte which your prepaid insurance acct would have a 0 balance.

Answer 2

The question can not be answered properly because you do not state the term of the insurance (how many periods it covers). Assuming the policy ends on Dec 31, 2008 take the initial cost of $6,000.00 and divide by the number of months involved. $6,000.00/31 =$193.54 is the final adjusting entry.

If the policy is continuing past Dec 31, 2008 then you would need the term of the policy and divide $6,000.00 by the number of periods in the term.

Answer 3

Your debits and credits are correct, but I'm not sure about the $ amount. What is the term of the insurance, was it given in months or years?