The total premium for each policy was paid in full (for all months) at the purchase date

Question:

Policy Date of Purchase Months of Coverage Cost
A April 1, 2010 24 $15,840
B April 1, 2011 36 13,068
C August 1, 2011 12 2,700
The total premium for each policy was paid in full (for all months) at the purchase date, and the Prepaid Insurance account was debited for the full cost. (Year-end adjusting entries for Prepaid Insurance were properly recorded in all prior years.) The company’s annual accounting period ends on December 31, 2011.

Answer:

A. April 1, 2010, 24 months, $15,840
$15,840/24 months = $660 per month
Amount used in 2011 is a whole year, 12 months: $660*12 = $7,920
Adjusting Journal entry:
Debit Insurance Expense 7,920
Credit Prepaid Insurance 7,920

B. April 1, 2011, 36 months, $13,068
$13,068/36 months = $363 per month
Amount used in 2011, April through December, 9 months: $363*9 = $3,267
Adjusting Journal entry:
Debit Insurance Expense 3,267
Credit Prepaid Insurance 3,267

C. August 1, 2011, 12, $2,700
$2,700/12 months = $225 per month
Amount used in 2011, August through December, 5 months: $225*5 = $1,125
Adjusting Journal Entry:
Debit Insurance Expense 1125
Credit Prepaid Insurance 1125

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