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For each separate case below, follow the 3-step process for adjusting the prepaid asset account at December 31.
Step 1: Determine what the current account balance equals.
Step 2: Determine what the current account balance should equal.
Step 3: Record the December 31 adjusting entry to get from step 1 to step 2.
Assume no other adjusting entries are made during the year.
a. Prepaid Insurance. The Prepaid Insurance account has a $4,700 debit balance to start the year. A re- view of insurance policies and payments shows that $900 of unexpired insurance remains at year-end.
b. Prepaid Insurance. The Prepaid Insurance account has a $5,890 debit balance at the start of the year. A review of insurance policies and payments shows $1,040 of insurance has expired by year-end.
c. Prepaid Rent. On September 1 of the current year, the company prepaid $24,000 for 2 years of rent for facilities being occupied that day. The company debited Prepaid Rent and credited Cash for $24,000.

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Answer:

a. Prepaid Insurance. The Prepaid Insurance account has a $4,700 debit balance to start the year. A re- view of insurance policies and payments shows that $900 of unexpired insurance remains at year-end.

Step 1: $4,700 debit balance

Step 2: $900 debit balance

Step 3: $4,700 - $900 = $3,800

Dr Insurance expense 3,800

    Cr Prepaid insurance 3,800

b. Prepaid Insurance. The Prepaid Insurance account has a $5,890 debit balance at the start of the year. A review of insurance policies and payments shows $1,040 of insurance has expired by year-end.

Step 1: $5,890 debit balance

Step 2: $4,850 debit balance (= $5,890 - $1,040)

Step 3: $1,040

Dr Insurance expense 1,040

    Cr Prepaid insurance 1,040

c. Prepaid Rent. On September 1 of the current year, the company prepaid $24,000 for 2 years of rent for facilities being occupied that day. The company debited Prepaid Rent and credited Cash for $24,000.

Step 1: $24,000 debit balance

Step 2: $20,000 debit balance (= $24,000 - $4,000)

Step 3: ($24,000/24) x 4 = $4,000

Dr Rent expense 4,000

    Cr Prepaid rent 4,000

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