[maggie122097]

I need help with the following:

An error was discovered during a recent audit at the beginning of 2006:

A five year casualty insurance policy was purchased at the beginning of 2004 for $35,000The full amount was debited to insurance expense at the time.

What the company recorded: Entry 2004
DR Insurance Expense 35,000
CR Cash 35,000

I know there should have been some kind of entry to prepaid insurance and 7000 depreciated over the 5 years. What I am having trouble with is the 2006 adjusting entry. I know prepaid insurance and accumulated depreciation are two of the accounts that I use but I am not sure if my answer is correct. Can someone please check it to see where I went wrong and what I need to change?

35,000/5=7,000
2006 adjusting entry: (I think I have the accounts mixed up)
DR Prepaid Insurance 35000
CR Accum. Dep 14000
CR Insurance expense 21000

[ddrahota]

DR Prepaid Insurance 35000
CR Prepaid Insurance 14000
CR Insurance Expense 21000

A note would probably need to be attached explaining the reason for the entry of a credit and debit to prepaid insurance, but the initial 35000 needs to be on the books so that is why you would want to debit the original amount paid for and then credit the difference.