An analysis of the company's insurance policies provided the following facts.

Policy Date of Purchase Months of Coverage Cost

A April 1, 2017 24 $10,824
B April 1, 2018 36 9,576
C August 1, 2019 12 8,424

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.)

Required:
So what would my adjusting journal entry be?

Answer:

Adjusting Journal in the year of payment:

December, 2017: Policy A

Debit Insurance Expense $4,059

Credit Prepaid Insurance $4,059

To record the insurance expense for the year (9 months).

December, 2018: Policy A and B

Policy A:

Debit Insurance Expense $5,412

Credit Prepaid Insurance $5,412

To record insurance expense for the year, 12 months.

Policy B:

Debit Insurance Expense $2,394

Credit Prepaid Insurance $2,394

To record insurance expense for the year, 9 months.

December, 2019:

Policy A:

Debit Insurance Expense $1,353

Credit Prepaid Insurance $1,353

To record insurance expense for the year, 3 months.

Policy B:

Debit Insurance Expense $3,192

Credit Prepaid Insurance $3,192

To record insurance expense for the year, 12 months.

Policy C:

Debit Insurance Expense $3,510

Credit Prepaid Insurance $3,510

To record insurance expense for the year, 5 months.

Explanation:

a) Data and Calculations:

Policy  Date of Purchase  Months of       Cost   Monthly

                                          Coverage                    Cost  

A         April 1, 2017                24          $10,824      $451 ($10,824/24)

B         April 1, 2018                36              9,576    $266 ($9,576/36)

C         August 1, 2019            12              8,424    $702 ($8,424/12)

b) The insurance expenses recorded under the three policies have been determined using the monthly rates.  In each year, the months covered are taken into consideration when computing the insurance expense for the year.  In this way, only the expenses incurred for the period are accounted for, in accordance with the accrual concept of accounting.

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