Question

Smokey's Sandwich Shoppe paid $3,000 for a 2-year insurance policy on March 1, 2018. The accountant forgot to make any adjustments during the year. What effect would this have on the financial statements for 2018?

Answer 1

Answer:
insurance expense 1,250 debit
prepaid insurance 1,250 credit
Explanation:
the insurance contract is for 2 year so, 24 months
3,000 is the value of 24 month of insurance:
3,000 / 24 = 125 per month
From March 1st, 2018 to December 31th,2018 --> 10 months
125 x 10 = 1,250
This is the case of an accrued expense.
Our prepaid insurance will decrease by this amount and we will recognize the 1,250 insurance expense.
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