Question

On July 1, 2020, Dobbs Co. pays $14,400 to Kalter Insurance Co. for a 3-year insurance contract. Both companies have fiscal years ending December 31. For Dobbs Co., journalize and post the entry on July 1 and the annual adjusting entry on December 31. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.)

Answer 1

Explanation:

The journal entries are as follows:

On July 1, 2020

Prepaid insurance Dr $14,400

        To Cash $14,400

(Being the cash paid for insurance is recorded)

On December 31, 2020

Insurance expense Dr $2,400

        To Prepaid insurance $2,400

(Being the insurance expense is recorded)

It is computed below:

= $14,400 × 6 months ÷ 36 months

= $2,400

                                        Prepaid Insurance

July 31           $14,400                      December 31       $2,400

December 31'

Balance         $12,000

                                        Insurance expense

December 31            $3,600