Kreative Kitchens purchased a 1-year insurance policy on 1 March 2017. The entire premium of $9000
was recorded by debiting Prepaid Insurance. Ignore GST. Required
A. Give the adjusting entry at 30 June for year ending 30 June 2017.
B. What amount should be reported in the 30 June 2017 statement of financial position for Prepaid
Insurance?
C. If no adjusting entry was made on 30 June, by how much would profit be overstated or understated?
Would assets be overstated or understated? Explain.
.If no adjusting entry were made on 31 December, by how much would profit be
overstated or understated? Would liabilities be overstated or understated? Explain.
D. What would your adjusting entry in requirement A be if the premium of $9000 was recorded by
debiting Insurance Expense
What would your adjusting entry be in requirement (a) if the amount of $6,400 had been
credit to Rental Revenue on 1 December 2020?e?
A. Insurance Expense 3 000
Prepaid Insurance 3 000 ($3000 = $9000 × 4/12)
Insurance expired. Prepaid insurance recorded at $9000 initially.
B. Prepaid insurance $6000 ($9000 – $3000) – current asset.
Insurance Expense 6 000
Insurance prepaid (thus leaving $3000 in Insurance Expense).