Answer: The answer is (d) Debit Insurance Expense, $2,400; credit Prepaid Insurance, $2,400.
Explanation: Please note that the insurance premium paid should be $4,800 and not $6,200, as was provided in the question.
Prepayment is an advance payment for services not yet enjoyed. When the prepaid insurance premium was made, the following entries were raised: Debit Prepaid insurance premium $4,800; Credit Cash $4,800. It is then amortize to expense (income statement) based on the tenor.
Since Harrod Company paid for 4-month insurance premium, the monthly amortization would be $1,200 per month ($4,800 divided by 4 months). Then, note that November and December amortization charges have not been accounted for, therefore we have 2 months amortization pending ($1,200 * 2 months = $2,400), which were appropriately adjusted for as above.
Answer:
December 31, accrued insurance expense
Dr Insurance expense 3,100
Cr Prepaid insurance 3,1000
Explanation:
the initial journal entry to record this transaction was:
November 1, purchase of 4 month insurance policy
Dr Prepaid insurance 6,200
Cr Cash 6,200
Since this company uses the accrual method of accounting, it must record expenses and revenues in the periods that they occur, not when they are paid or collected. In this case, only 2 months worth of insurance was accrued = ($6,200 / 4 months) x 2 months = $3,100.
