Arnez Co. follows the practice of recording prepaid expenses and unearned revenu
ID: 2378353 • Letter: A
Question
Arnez Co. follows the practice of recording prepaid expenses and unearned revenues in balance sheet accounts. The company's annual accounting period ends on December 31, 2013. The following information concerns the adjusting entries to be recorded as of that date.
An analysis of the company's insurance policies provided the following facts:
Policy Date of Purchase Months of Coverage Cost A April 1, 2011 24 $ 14,400 B April 1, 2012 3612,960 C
August 1, 2013
12
2400
Explanation / Answer
An analysis of the company's insurance policies provided the following facts:
Policy A was purchased on April 1, 2011 for 24 months at the amount of $14,400.
15,840 / 24 = 660 per month
600 x 12 months = 7,200
Policy B was purchased on April 1, 2012 for 36 months at the amount of $12,960.
12,960 / 36 = 360 per month
360 x 9 months = 3,240
Policy C was purchased on August 1, 2013 for 12 months at the amount of $2,400.
2,400 / 12 = 200 per month
200 x 5 months = 1,000
The total premium for each policy was paid in full (for all months) at the purchase date, and the Prepaid Insurance account was debited for the full cost. (Year-end adjusting entries for Prepaid Insurance were properly recorded in all prior years.)
7,200 +3,240 + 1,000 = 11,440 adjustment
Dr Insurance Expense 11,440
Cr Prepaid Insurance 11,440
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