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Adjusting Entries - Khan Company

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
Date Subscriptions
October 1 200
November 1 300
December 1 480
980 (total)

Solution Preview

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 ...

Solution Summary

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.