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Following are three separate transactions that pertain to prepaid items. Evaluate each item and prepare the journal entries that would be needed for the initial recording and subsequent end-of-20X3 adjusting entry. Assume the company uses the balance sheet approach, and the initial recording is to an asset account. The company has a calendar year-end and does not make any adjusting entries prior to December 31.
| (1) | The company purchased an 18-month insurance policy for $18,000 on June 1, 20X3. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (2) | The company started 20X3 with $20,000 in supplies (this was previously recorded, and you do not need to make an entry for the beginning balance), purchased $30,000 in supplies during the year, and found only $13,000 in supplies on hand at the end of 20X3. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (3) | The company paid $2,500 to rent a truck. The rental period began on December 16, 20X3, and ends on February 14, 20X4.
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Question & Answer: Following are three separate transactions that pertain to prepaid items. Evaluate each item and prepare the journal entries that…..
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Expert Answer
| General Journal | |||
| Date | particulars | Debit | Credit |
| 1st June | Prepaid Insurance | $ 18,000.00 | |
| To Cash | $ 18,000.00 | ||
| (Being Amount of Insurance policy Purchased for 18 months) | |||
| 31st Dec | Insurance=($18000*7/18) | $ 7,000.00 | |
| To Prepaid Insurance | $ 7,000.00 | ||
| (Being Amount of prepaid Insurance trf to Insurance A/c) | |||
| Various | Office Supplies Expenses | $ 20,000.00 | |
| To Cash | $ 20,000.00 | ||
| (Being Amount of Office Expenses incurred $20000) | |||
| 31st Dec | Supplies Supplies | $ 13,000.00 | |
| To Office Supplies Expenses | $ 13,000.00 | ||
| (Being Amount of Office Supplies at the year end) | |||
| 16th Dec | Prepaid Rent | $ 2,500.00 | |
| To Cash | $ 2,500.00 | ||
| (Being amount of Prepaid rent) | |||
| 31st Dec | Rent (2500*.5/2) | $ 625.00 | |
| To Prepaid Rent | $ 625.00 | ||
| (Being amount of Prepaid Rent Transferred to Rent A/c) | |||
| Note: | |||
| Assets Method: Under assets method expense paid in advance will be recorded as an assets. | |||
