On 3 December Northlake Nordic Centre Inc. paid $6,000 for a twelve-month insurance policy effective 1 December and debited Prepaid Insurance. Record the adjusting entry at 31 December.
On 3 December Northlake Nordic Centre Inc. paid $6,000 for a twelve-month insurance policy effective 1 December and debited Prepaid Insurance. Record the adjusting entry at 31 December.
Answer
Dr Insurance Expense 500; Cr Prepaid Insurance 500
Accounts - Insurance Expense - Prepaid Insurance - Cash - Accounts Payable One of twelve months has expired: 6,000 × 1/12 = **500**. **Insurance Expense** (debit) for the month used; **Prepaid Insurance** (credit) to reduce the asset to the 5,500 unexpired. The trap is **Cash** — the payment was recorded on 3 December, and an adjustment never touches Cash. Expensing the whole 6,000 is the other error: eleven months of cover are still an asset.
Hermanson Vol 1 ch 3 (prepaid expenses; the alternative treatment); Dauderis & Annand §3.2 (concept map D6, D12)