Question 5BE
Question
BE3-5 (L02,3) Assume that on February 1, Procter & Gamble (P&G) paid $720,000 in advance for 2 years’ insurance coverage. Prepare P&G’s February 1 journal entry and the annual adjusting entry on June 30.
Step-by-Step Solution
Verified Answer
The amount of prepaid insurance used is $150,000.
1Meaning of Prepaid Insurance
Payment of premium by insured to insurer entity before the due date is prepaid insurance. It is current assets for the insured therefore shown in the balance sheet under the sub-head of current assets.
2Journal Entries
Date | Accounts and Explanation | Debit $ | Credit $ |
Feb 1 | Prepaid Insurance | $720,000 |
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| Cash |
| $720,000 |
|
|
|
|
June 30 | Insurance expenses | $150,000 |
|
| Prepaid insurance ($720,000 x 5/24) |
| $150,000 |
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|
|
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