Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 94

Prepaid expenses—insurance

a. Use the horizontal model or write the journal entry to record the payment of a one-year insurance premium of $3,000 on March 1.

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b. Use the horizontal model or write the adjusting entry that will be made at the end of every month to show the amount of insurance premium “used” that month.

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c. Calculate the amount of prepaid insurance that should be reported on the August 31 balance sheet with respect to this policy.

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d. If the premium had been $6,000 for a two-year period, how should the prepaid amount at August 31 of the first year be reported on the balance sheet?

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e. Why are prepaid expenses reflected as an asset instead of being recorded as an expense in the accounting period in which the item is paid?

Step 1 of 8

Prepaid expense-Insurance:

Prepaid expense: Prepaid expenses are treated as assets that turn into expenses as they get used up or expired.