On July 1, 2017, Lopez Company paid $3,000 for six months of insurance coverage. No adjustments have been made to the Prepaid Insurance account, and it is now December 31, 2017. Zim Company has a Supplies account balance of $8,600 on January 1, 2017. During 2017, it purchased $3,800 of supplies. As of December 31, 2017, a supplies inventory shows $1,700 of supplies available. Prepare the journal entries to reflect expiration of the insurance and correctly report the balance of the Supplies account and the Supplies Expense account as of December 31, 2017.

Debit Insurance expense $3,000

Credit Prepaid Insurance $3,000

Being entries to recognize Insurance expense

Debit Supplies expense $10,700

Credit Supplies account $10,700

Being entries to recognize supplies used up as at December 31, 2017

Explanation:

When insurance is paid in advance, the entries required are  

Debit Prepaid Insurance

Credit Cash account

As time elapses and the insurance expires,

Debit Insurance expense

Credit Prepaid Insurance

When Supplies are purchased, Debit supplies and credit Cash/Accounts payable. As Supplies are used up, debit supplies expense (with the amount used) and Credit Supplies account.

When $3,800 worth of supplies are purchased, the balance in the supplies account

= $8,600 + $3,800

= $12,400

If at the end of the year, the balance in supplies is $1,700, the amount used up and to be expensed

= $12,400 - $1,700

= $10,700

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