On July 1, 2019, Metlock, Inc. pays $16,500 to Kalter Insurance Co. for a 3-year insurance contract. Both companies have fiscal years ending December 31 For Metlock, Inc., journalize and post the entry on July 1 and the annual adjusting entry on December 31. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.)

On July,1 2019, the following entries are shown in the books:

Dr Insurance prepayment   $16,500

Cr Cash                                              $16,500

At the end of the year,the adjusting entries would be:

Dr Insurance expense         $2,750

Cr Insurance prepayment               $2,750

Explanation:

The cash outflow due to payment for insurance reflects as a credit entry in cash account,a decrease in cash, while the corresponding debit is shown in the insurance prepayment account, an increase in asset.

However, at the end of the year,Metlock would incurred six months of insurance expense, hence $2750  (6/36*$16,500) would be shown in insurance expense as a debit while the credit reflects in insurance prepayment account, a reduction in asset.

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