Bristol Corporation is a manufacturer of high-tech industrial parts that was sta

Question

Bristol Corporation is a manufacturer of high-tech industrial parts that was started in 1999 by two talented engineers with little business training. In 2011, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2011 before any adjusting entries or closing entries were prepared.

a. A five-year casualty insurance policy was purchased at the beginning of 2009 for $35,000. The full amount was debited to insurance expense at the time.

prepare any journal entry necessary as a result of the situation described (you may ignore taxes). (If no journal entry is required, please specifically state that.) And also prepare any adjusting entry required for 2011 related to the situation described. (If no adjusting journal entry is required, please specifically state that.)

Explanation / Answer

This one isn't really that bad. So start by recording the journal entry that the problem gives you, even though we know it's messed up. Dr. Insurance Expense ....35000 Cr. Cash ...............................35000 Now, this is wrong. You do not record the entire insurance expense when you buy insurance. You record it, generally, on a yearly basis, putting the "leftover" insurance in its own asset account. They should made the following entry: Dr. Prepaid Insurance .....35000 Cr. Cash ...............................35000 And then they would make the following as the adjusting entry for the two years they used their insurance. Dr. Insurance Expense ....14000 Cr. Prepaid Insurance ................14000 What's the difference -- how do we fix the initial error with what should be right? You can make a series of t-accounts and find the difference, but you should find that it amounts to: Dr. Prepaid Insurance .....21000 Cr. Insurance Expense ................21000

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