Question

16) On January 1, a business purchased a five-year insurance policy for $2,500 with coverage starting immediately. If the purchase was recorded in the Prepaid Insurance account, and the company records adjustments only at year-end. Draw the T-account for Prepaid Insurance to show the this adjustment. 17) Grayson Inc. leased a portion of its store to another company for 10 months beginning on July 1, at a monthly rate of $700. Grayson collected the entire $7,000 cash on July 1 and recorded it as unearned revenue. Assuming adjusting entries are only made at year-end, the adjusting entry made by Grayson Inc. on December 31 would be:

Answer 1

Solution

16.

Prepaid Insurance paid for 5 years = $ 2,500

Insurance expense per year = $ 2,500 / 5 = $ 500

Prepaid Insurance Account
Date	account	Debit	Date	Account	Credit
Year 1		$			$
Jan-01	To Cash	2,500	Dec-31	Insurance Expense	500
			Dec-31	Closing balance	2,000
	Total	2,500		Total	2,500
Year 2
Jan-01	To Opening Bal	2,000	Dec-31	Insurance Expense	500
			Dec-31	Closing balance	1500
	Total	2,000		Total	2,000
Year 3
Jan-01	To Opening Bal	1,500	Dec-31	Insurance Expense	500
			Dec-31	Closing balance	1000
	Total	1,500		Total	1,500
Year 4
Jan-01	To Opening Bal	1,000	Dec-31	Insurance Expense	500
			Dec-31	Closing balance	500
	Total	1,000		Total	1,000
Year 5
Jan-01	To Opening Bal	500	Dec-31	Insurance Expense	500
			Dec-31	Closing balance	0
	Total	500		Total	500

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17.

Whole Amount received of $ 7,000 is already credited to Unearned revenue account on July 1.

Till Dec 31 , only 6 months amount of Lease will be earned . ( from July 1 to Dec 31 )

Total Lease Revenue will be $ 700 x 6 = $ 4,200

	Adjustment Journal entry
Date	Description	Debit	Credit
Dec-31	Unearned Revenue A/c Dr	$ 4,200
	To Lease Revenue A/c		$ 4,200
	( Adjustment Entry for Lease Revenue earned during the year. )

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