Hello,

I need some help with understanding how to journalize a transaction using the Alternative treatment of prepaid expenses and unearned revenues.

A company purchased a one year insurance policy on August 1, 2008 for $4740 cash. Assuming year end is December 31, 2008. PART 1. I need to prepare a journal entry, assuming that prepaid cost as expenses. PART 2. I need to prepare the adjusting entry on December 31, 2008, assuming that prepaid cost as expenses.

I understand Part 1.

Debit Credit
Aug 1 Insurance Expense 4,740
Cash 4,740


I am confused with Part 2. Do I have to prepare journal entries for every month, Sept, Oct, etc... or I am I just preparing one entry for the year end Dec 31, 2008? If this is correct would Part to be

Part 2

Dec 31 Prepaid Insurance 2,765
Insurance Expense 2,765

Thanks

Assuming your debits are listed first (you can't do columns), then what you have is correct.

And if it doesn't specifically say that you're doing an entry at the end of such-and-such month, then it's only done at year-end. That is, if they wanted the other months, they would have said so, or if the other months had already been adjusted and you only wanted December, it also would have said so. Since it doesn't say so, it's only being done at year-end.

By the way, good job. Most people get totally freaked over this "alternative" method.