I'm having a hard time solving this problem. I think I should divide 18,000 by 12 or 36

BE3-6

On July 1, 2010, Spahn Co. pays $18,000 to Randle Insurance Co. for a 3-year insurance contract. Both companies have fiscal years ending December 31. Prepare the journal entry on July 1 and the adjusting entry on December 31 for Randle Insurance Co.

Date Account/Description Debit Credit
July 1




Dec. 31

Divide your $18,000 by 36 to get your monthly rate, then take this number times the number of months used to get your adjusting entry amount.

Your first entry will be:
Debit Prepaid Insurance for 18,000
Credit Cash for 18,000

Your Adjusting entry will be:
Debit Insuarnce Expense for the amount calculated above
Credit Prepaid Insurance for the same amount.

First entry:

Prepaid Insurance 18,000
cash 18,000

For adjusting entry Dec 31
Adjust 6 months of prepaid insurance ( 18,000 X 6/36)

Insurance Expense 3000
prepaid insurance 3000