On January 1, DogMart Company purchased a two-year liability insurance policy for $22,800 cash. The purchase was recorded to Prepaid Insurance. Prepare the January 31 adjusting entry.

Adjusting Entry

Date             Accounts/ Description          Dr.        Cr.

January 31   Insurance Expenses            $950

                    Prepaid Insurance                            $950

Explanation:

On January 1 insurance purchased will be considered as the prepaid insurance and it is for 2 years ( 24 months ). On January 31 one month's insurance expense has been accrued and it should be recorded and balance for this accrual should be transferred from prepaid insurance to insurance expense account.

Insurance paid =  $22,800

Per month Insurance = $22,800 / 24 = $950 per month

insurance expense   950 debit

      prepaid insurance 950 credit

Explanation:

When the firm purcahses the insurance it acquired the right in their favor thus, it gets an assets. As times passes the policy expires therefore, the asset of the firm llose value Hence, at the end of the month we have to adjust for the expired portion of the insurance

22,800 is the value of the entire two years:

22,800 / 24 months (two years) = 950 cost per month

we decrease the prepaid insurance and recognize their expense as a result of past of time.

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