Following is the question:

Prepare adjusting entery for year end of 2008

Prepaid Insurance contains the premium costs of two policies:

Policy 1: cost of 2,400, 2 year term taken out and effective on August 1, 2008

Policy 2 cost of 1,200, 1 year term taken out April 1, 2008.

My answer,

Ploicy 1:Insurance expense 500
Prepaid Insurance 500

Ploicy 2: Insurance expense 900
Prepaid insurance 900

Is this correct Adjusting J/E?

Is this correct Adjusting J/E?

NO , both entries are INCORRECT.

They are incorrect as to the entries themselves.
They should be the other way round.

DEBIT Insurance Prepaid Account
Credit Insurance Expense Account.

ALSO :-
The amounts are incorrect.

Policy 1: cost of 2,400, 2 year term taken out and effective on August 1, 2008

EXPIRED = 5 months
UNEXPIRED = 17 months

Amount Prepaid is = 17/24 of 2,400

______________________________________

Policy 2 cost of 1,200, 1 year term taken out April 1, 2008.

EXPIRED = 9 months
UNEXPIRED = 3 months

Amount Prepaid is 3/12 of 1,200.

midonotknow has made the correct entries to adjust prepaid insurance account. Rolcam'e entries would be correct to adjust where the original entries were recorded as an expense.

So, which one is correct basing on the question alone?

Quote:

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Originally Posted by midonotknow

So, which one is correct basing on the question alone?

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Both of your entries are correct. Since the original payment was recorded as debit to prepaid expenses, the adjustment is required for the expired portion of the prepayment. The formula is:

(Prepayment made x expired period)/total period covered.

Quote:

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Originally Posted by rehmanvohra

Both of your entries are correct. Since the original payment was recorded as debit to prepaid expenses, the adjustment is required for the expired portion of the prepayment. The formula is:

(Prepayment made x expired period)/total period covered.

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Thanks