Please help with Journal Entries questions/challenge

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  • #190607
    kobebryant168
    Participant

    Hi guys, need some help with journal entries questions

    A company has annual premiums are $12,000 for the period covering Jan 1, 2014- Dec 31, 2014

    For Jan 2014 close, assuming no invoice was recorded by AP, what entries are needed prior to closing the month of January?

    I have:

    DR: Insurance Expense $1,000

    CR: Accrued Liabilities $1,000

    DR: Prepaid Insurance $12,000

    CR: Accounts payable $12,000

    For Feb 2014 close, AP recorded and paid 50% of annual premiums

    question: what entry would have been recorded in GL when AP entered the invoice?

    I have:

    DR: Insurance Expense $1,000

    CR: Prepaid Insurance $1,000

    A/P- no entries

    Please let me know if I’m wrong, thanks

Viewing 10 replies - 1 through 10 (of 10 total)
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  • #627129
    Anonymous
    Inactive

    Hi Kobe, this is what I am coming up with:

    In January you would only accrue the expense as the invoice is assumed to not have been received. Entry would be:

    DR Insurance Expense $1,000

    CR Accrued Liability $1,000

    Then in February we receive the invoice. Entry would be:

    DR Prepaid Insurance $10,000

    DR Accrued Liability $1,000

    DR Insurance Expense $1,000

    CR Accounts Payable $6,000

    CR Cash $6,000

    #627130
    silvercamaro77
    Participant

    I agree with brooks about the Jan entry. I question the February entry, because the way I read it, AP only recorded 50% of the total invoice. I would have said the entry from AP would be:

    DR PPD Insurance 5,000

    DR Accrued Liability 1,000

    CR Cash 6,000

    And the accountant would have an entry in February to record the prepaid amortization of the premium that had been entered and paid:

    DR Insurance Expense 1,000

    CR PPD Insurance 1,000

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    #627131
    Anonymous
    Inactive

    January you would accrue the expense. 1/12

    so you would have

    Expense 1000

    Accrued Expense (1000)

    Feb AP paid half so you would have

    AP (6000)

    Expense 1000 —>Feb Insurance Expense

    Prepaid Insurance 4000 —> March Through June Prepay

    Accrued Expense 1000 —> Removes Accrued Expense from January

    #627132
    stoleway
    Participant

    Your journal entries above is really confusing, but this is what I came up with.

    During Jan, AP did not record the transaction but they caught the error prior to closing

    Insurance Expense…………….1000dr

    Accrued Liability………………………………………..1000cr

    For Feb 2014 close, AP recorded and paid 50% of annual premiums

    Accrued Liability…………………..1000dr

    Insurance Expense (Feb)………1000dr

    Prepaid Expense………………….4000dr

    Cash………………………………………………………………..6000cr

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    #627133
    Anonymous
    Inactive

    Oh, I am wrong. Sorry.

    The element I am struggling with is that the entity will be receiving an invoice for the full $12,000. I can't figure out the plug though. I agree that this is the $6,000 entry in February:

    DR Accrued Liab 1,000 (January)

    DR Ins Expense 1,000 (February)

    DR Prepaid 4,000 (March-June)

    CR Cash 6,000

    But, I guess there's really not a way to look at the $6,000 for July through December (although the invoice will be for a full amount of $12,000).

    #627134
    kobebryant168
    Participant

    Thank you so much guys!

    Now in addition there's a question:

    At the end of the month (Feb 2014), what JE would you propose prior to closing Feb? Assume the 50% payment is the first installment for the annual premiums.

    I'm confused with this!

    Help is greatly appreciated!

    #627135
    stoleway
    Participant

    This is an anticipated liability, I don't think you can fully record liability when you've actually not incurred or used the service.

    In this case, the transaction will be recorded as time passes.

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    BEC- 59│70│ 71 │78!
    AUD- 75!
    FAR- 87!

    Mass-CPA

    #627136
    acctaks
    Participant

    Initial entry.

    DR: insurance expense 1000

    CR: AP 1000

    2nd

    DR: AP 1000

    DR: insurance expense 1000

    DR: prepaid insurance 4000

    CR: cash 6000

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    #627137
    kobebryant168
    Participant

    Guys, I reworked on my question and here's what I come up with:

    A company has annual premiums are $12,000 for the period covering Jan 1, 2014- Dec 31, 2014

    For Jan 2014 close, assuming no invoice was recorded by AP, what entries are needed prior to closing the month of January?

    I have:

    DR: Insurance Expense $1,000

    CR: Accrued Liabilities $1,000

    For Feb 2014 close, AP recorded and paid 50% of annual premiums

    Question: what entry would have been recorded in GL when AP entered the invoice?

    I have:

    DR: Insurance Expense $1,000

    DR: Prepaid Insurance $5,000

    CR: Accounts Payable $6,000

    Question: what entry would hav been recorded in GL when AP paid the invoice?

    DR: Accounts Payable $6,000

    CR: Cash $6,000

    Question: At the end of Feb, what JE would you propose prior to closing Feb? Assume above payment is the first installment for the annual premiums?

    (Note: I'm reversing two accounts to make sure they have the correct balance at the end of the month: accrued liabilities should be zero now because invoice has been received and recorded; prepaid insurance should have balance of $4,000 because $6,000 has been paid and two months have passed)

    DR: Accrued liabilities $1,000

    CR: Prepaid Insurance $1,000

    Please let me know if I'm wrong, thanks

    #627138
    acctaks
    Participant

    You got the correct entries from several posters.

    The way you are trying to work it has major flaws

    1. You only have 2,000 expense

    2. Your prepaid insurance is 5,000 at the end of the second month. If it's 12,000 annual there's no way it can be that and the end of the second month. Plus, why are you booking prepaid insurance against AP? So, you're saying that it's prepaid but you need to pay it?

    3. You have an accrued liability of 1,000 plus AP of 6,000. So, why do you have a 7,000 liability for a half year of insurance? You reversed the AP but you still have 1,000 sitting as a liability. You would double that if you posted the entries this way for the second half.

    I'm not trying to belittle you or anything of the sort so please don't take it that way. Your transactions have to balance though. It's fundamental! I suggest T accounts. They will help you keep everything in balance.

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