The following account balances are taken from the records of Chauncey Company at
ID: 2377350 • Letter: T
Question
The following account balances are taken from the records of Chauncey Company at December 31, 2010. The Prepaid Insurance account represents the cost of a three-year policy purchased on August 1, 2010. The Rent Collected i Advance account represents the cash received from a tenant on June 1, 2010, for 12 months' rent beginning on that date. The Note Receivable represents a nine-month promissory note received from a customer on September 1, 2010. Principal and interest at an annual rate of 9% will be received on June 1, 2011.Prepaid Insurance $ 7,200 debit
Rent Collected in Advance $6,000 credit
Note Receivable $ 50,000 debit
Required
1. Prepare the three necessary adjusting entries on the books of Chauncey on December 31, 2010. Assume that Chauncey prepares adjusting entries only once a year, on December 31.
2. Assume that adjusting entries are made at the end of each month rather than only at the end of the year. What would be the balance in Prepaid Insurace before the December adjusting entry was made? Explain your answer.
Explanation / Answer
Required
1. Prepare the three necessary adjusting entries on the books of Chauncey on December 31, 2010. Assume that Chauncey prepares adjusting entries only once a year, on December 31.
Chauncey paid for 3 years’ of insurance, which is 36 months.
$7,200/36 = $200 per month.
August to December is 5 months. 5*$200 per month = $1,000.
Entry:
Debit: Insurance expense 1,000
Credit: Prepaid insurance 1,000
Rent collected in advance = 6,000 for one year. 6,000/12 = $500 per month.
From June to December is 7 months. 7*$500 per month = $3,500.
Entry:
Debit: Rent Collected in Advance 3,500
Credit: Rent Revenue 3,500
Promissory note for 50,000, interest rate of 9%, September to December is 4 months.
Interest = Principal*rate*time = 50,000*0.09*4/12 = $1,500
Entry:
Debit: Interest receivable 1,500
Credit: Interest earned 1,500
2. Assume that adjusting entries are made at the end of each month rather than only at the end of the year. What would be the balance in Prepaid Insurace before the December adjusting entry was made? Explain your answer.
Balance would be $6,400.
Reason: At the end of each month from August to November, $200 would be credited to prepaid insurance. That’s four months, so a total of $800 would be credited, leaving a balance of 7200 – 800 = $6,400.