A review of the ledger of Khan Company at December 31, 2006, produces the following
data pertaining to the preparation of annual adjusting entries.
1. Prepaid Insurance $9,800. The company has separate insurance policies on its buildings and its motor vehicles. Policy B4564 on the building was purchased on July 1, 2005, for $6,000. The policy has a term of 3 years. Policy A2958 on the vehicles was purchased on January 1, 2006, for $4,800. This policy has a term of 2 years.
2. Unearned Subscriptions $49,000. The company began selling magazine subscriptions in 2006 on an annual basis. The magazine is published monthly. The selling price of a subscription is $50. A review of subscription contracts reveals the following.
Subscription Number of
October 1 200
November 1 300
December 1 480
1. Building policy = $6000 / 3 years = $2000/yr
Vehicle policy = $4800 / 2 = $2400/yr
Debit Insurance expense $4400
Credit Prepaid insurance $4400
To expense 12 months of ...
The solution shows the calculation details for arriving at the amount needed for the adjusting entries. The entries are also shown with a description followed by a proof of the amounts.