Question

A+T Williamson Company is making adjusting entries for the year ended December 31 of the current year. In developing information for the adjusting entries, the accountant learned the following:______. A. A two-year insurance premium of $6,000 was paid on October 1 of the current year for coverage beginning on that date. The bookkeeper debited the full amount to Prepaid Insurance on October 1. B. At December 31 of the current year, the following data relating to Shipping Supplies were obtained from the records and supporting documents.Shipping supplies on hand, January 1 of the current year $17,500
Purchases of shipping supplies during the current year 62,500
Shipping supplies on hand, counted on December 31 of the current year 13,000
1. What amount should be reported on the current year's income statement for Insurance Expense? For Shipping Supplies Expense?
2. What amount should be reported on the current year's balance sheet for Prepaid Insurance? For Shipping Supplies?

Answer 1

Answer:

The following amounts shall be reported on 31 December of the current year.

1.

Insurance expense = $750

Shipping Supplies expense = $67000

2.

Prepaid Insurance = $5250

Shipping Supplies = $13000

Explanation:

1.

The insurance paid on October 1 of $6000 was for two years or 24 months. This means that the premium paid per month was of = 6000 / 24 = $250

On 31 December of the current year, the insurance for 3 months have been used and the insurance expense should be recorded for 3 months ending 31 December of $750.

Insurance expense till 31 December = $250 * 3 = $750

The shipping supplies expense can be calculated based on the consumption of shipping supplies in the current year. The consumption can be calculated as follows,

Consumption = Opening Inventory + Purchases - Closing Inventory

Consumption = 17500 + 62500 - 13000

Consumption = $67000

So, shipping supplies expense for the current year is $67000

2.

Out of the prepaid insurance of $6000, 3 months of insurance worth $750 has been expensed out till 31 December. Thus the remaining balance in the prepaid insurance account will be = 6000 - 750 = $5250

The closing balance of shipping supplies has been provided on 31 December and this balance of $13000 will be reported on balance sheet as shipping supplies.