Is this correct:

I received a bill for Insurance in the total amount of $12,000. The down payment is $4000, and the monthly bills thereafter would be $1000 a month for 8 months.

I book it as follows:

1/1/08 DR Prepaid Insurance 4000
CR Cash 4000

2/1/08-8/1/08 DR Insurance Expense 1000
CR Cash

I stop receiving bills, and expense the downpayment (sitting in prepaid) for the next 4 months:

9/1/08-12/1/08 DR Insurance Expense 1000
CR Prepaid Insurance 1000


Is this correct?

Quote:

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Originally Posted by westernnv

Is this correct:

I recieved a bill for Insurance in the total amount of $12,000. The down payment is $4000, and the monthly bills thereafter would be $1000 a month for 8 months.

I book it as follows:

1/1/08 DR Prepaid Insurance 4000
CR Cash 4000

2/1/08-8/1/08 DR Insurance Expense 1000
CR Cash

I stop receiving bills, and expense the downpayment (sitting in prepaid) for the next 4 months:

9/1/08-12/1/08 DR Insurance Expense 1000
CR Prepaid Insurance 1000


Is this correct?

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I don't know if it matters but my neighbor's daughter came home yesterday with this same question - I only know because they brought it over here, thinking I would know, and I had absolutely no idea.

Is this homework or your experience?

My experience.

Quote:

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Originally Posted by westernnv

My experience.

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Wow - amazing.

Yes, this is correct. In your case, you would reduce your prepaid balance by 1,000 and recognize the expense for 1,000 for 4 months.

In my opinion, if the insurance is for the current period, the $4000 is not prepaid it is a down payment on the full $12,000. You are actually making payments on the remaining $8000 for 8 months. Therefore you would:
Debit insurance expense for $12,000.
Credit cash for $4000.
Credit Notes Payable Insurance for $8000.00
Each month when you make a $1000. Payment Debit Notes payable insurance and credit cash.

Quote:

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Originally Posted by jean3255

In my opinion, if the insurance is for the current period, the $4000 is not prepaid it is a down payment on the full $12,000. You are actually making payments on the remaining $8000 for 8 months. Therefore you would:
Debit insurance expense for $12,000.
Credit cash for $4000.
Credit Notes Payable Insurance for $8000.00
Each month when you make a $1000. payment Debit Notes payable insurance and credit cash.

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This is incorrect. You are not properly realizing your expenses correctly. This is a basic concept of accrual based accounting, the "matching" principle. You would incrementally incur the expense as time passes (i.e. recognize $1k expense with each passing month). Even if the $4,000 is a downpayment. You would treat it the same way as a prepaid and alleviate it with each passing month.