Accrual Accounting prepaid expense question? Adjusting entry for prepaid expense

Question

Accrual Accounting prepaid expense question?

Adjusting entry for prepaid expense MNO Ltd purchased a one-year insurance policy on 1 April. The entire premium of $6000 was recorded by debiting prepayments. Year-end is 30 June. Give the 30 June adjusting entry. What amount should be reported in the 30 June balance sheet for prepayments? If no adjusting entry was made on 30 June, by how much would net profit be overstated or understated? Would assets be overstated or understated? What would your adjusting entry in question 1 be if the premium of $6000 was recorded by debiting insurance expense?

Explanation / Answer

Yes this is a prepaid expense question

1) Adjustment entry for 30th Jun

Insurance A/c Dr. $1,500

To Prepaid Insurance Dr. 1,500

Being actual insurance for 3 months

2) Under Balance sheet, $4,500 should be reported as Prepaid insurance as Asset.

3) If adjustment entry in pt 1 is not posted, then the profit would have been overstated by $1,500

4) If entire $6,000 was posted to Insurance instead of prepaid insurance, then the adjustment entry would be as follows

Prepaid Expense A/c Dr. 4,500

To Insurance A/c Cr. 4,500

This would mean the excess posted in insurance for the remaining months of the next year is deferred.

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