Lesson 018 - Adjusting Entries 2: Prepaid Expenses (Insurance)

Summary

This lesson focuses on prepaid insurance and insurance expense adjustments. The instructor discusses a more complex example of how companies manage insurance policies paid in advance and calculate the insurance expense for each period. The lesson walks through multiple policies and explains how to allocate insurance expenses over different periods, as well as how to determine prepaid insurance balances for financial statements. The example covers calculations for policies from 2020 to 2023, emphasizing key concepts in adjusting entries for insurance. The next session will cover deferred revenue.

Takeaways

• 🎶 The video begins with an introduction to lesson 18, focusing on prepaid insurance and insurance expense.
• 🧾 The lesson builds on the previous discussion of adjusting entries, specifically prepaid insurance policies.
• 📅 A company has purchased multiple insurance policies in advance, and the focus is on how to calculate insurance expense for each reporting period.
• 💡 The main objective is understanding how prepaid insurance and insurance expense are reported in financial statements.
• 🔢 The video provides an example with three insurance policies, each with different coverage periods and amounts.
• 📊 The calculation involves determining the insurance expense for each year by multiplying the insurance amounts by the fraction of the coverage period within the year.
• 📝 The 2020 insurance expense is calculated by prorating each policy's cost based on the months covered in that year, leading to a total insurance expense of 8,980.
• 📉 Prepaid insurance is calculated by subtracting the total insurance expense for 2020 from the total prepaid amount, resulting in a remaining prepaid insurance balance.
• 📆 The same process is repeated for the years 2021, 2022, and 2023, adjusting for the remaining months of coverage.
• 📑 By the end of 2023, all prepaid insurance is used up, and the balance of prepaid insurance becomes zero.

Q & A

What is the main topic discussed in the lesson?

The lesson discusses prepaid insurance, insurance expense, and how to account for them in the financial statements, focusing on how companies handle insurance policies paid in advance.

What is prepaid insurance, and how is it accounted for?

Prepaid insurance refers to insurance premiums paid in advance for coverage in future periods. It is initially recorded as an asset on the balance sheet and expensed gradually as the coverage period elapses.

How do you calculate insurance expense for a specific period?

To calculate the insurance expense for a specific period, you multiply the total insurance premium by the fraction of the coverage period that has elapsed. For example, if an insurance policy covers 12 months and 9 months have passed, the expense would be 9/12 of the total premium.

What are the details of the three insurance policies purchased by the company in the example?

The three policies are: Policy M for $7,440 covering April 1, 2022 to March 31, 2023, Policy N for $12,000 covering July 30, 2022 to July 30, 2023, and Policy L for $16,200 covering November 1, 2022 to October 31, 2023.

How is the total insurance expense for 2020 calculated in the example?

The total insurance expense for 2020 is calculated by multiplying the premiums of each policy by the fraction of the year they were active. Policy M is active for 9 months (5,580), Policy N for 5 months (2,500), and Policy L for 2 months (900). The total is $8,980.

What is the prepaid insurance balance on December 31, 2020?

The prepaid insurance balance on December 31, 2020, is $26,660, calculated as the total insurance purchased ($35,640) minus the insurance expense recognized in 2020 ($8,980).

How do the policies affect the financial statements in 2021?

In 2021, Policy M has 3 months remaining ($1,860), Policy N has 12 months ($6,000), and Policy L has 12 months ($5,400), resulting in a total insurance expense of $13,260. The prepaid insurance balance at the end of 2021 is $13,400.

What is the insurance expense for 2022, and how is it calculated?

The insurance expense for 2022 is $8,900. This is calculated based on the remaining coverage of Policy N for 7 months ($3,500) and Policy L for 12 months ($5,400). Policy M had expired by the start of 2022.

What is the remaining prepaid insurance balance at the end of 2022?

The remaining prepaid insurance balance at the end of 2022 is $4,500, calculated as the previous balance of $13,400 minus the insurance expense of $8,900 recognized in 2022.

What is the final insurance expense for 2023, and what happens to the prepaid insurance balance?

The insurance expense for 2023 is $4,500, based on the remaining coverage of Policy L for 10 months. At the end of 2023, the prepaid insurance balance is zero since all policies have expired.

Outlines

00:00

🎓 Introduction to Prepaid Insurance and Adjusting Entries

The video introduces lesson 18, where the focus is on prepaid insurance and insurance expense. The instructor mentions that the last lesson covered adjusting entries and accrued expenses. This session will explore a more complex example involving a company that pays for insurance policies in advance and how to calculate the insurance expense and prepaid insurance reported in financial statements. The example is based on a German company that purchased multiple insurance policies. Viewers are encouraged to download the handout provided in the description.

05:02

📝 Breakdown of the Insurance Policies Purchased

The German company bought three insurance policies: Policy M for $7,440, Policy N for $12,000, and Policy L for $16,200. The video goes over the coverage periods for each policy and explains that the challenge is to compute the insurance expense and prepaid insurance at the end of each reporting period. The instructor calculates the total policy amount to be $35,640, then outlines how the coverage periods and months remaining will affect the final calculations for insurance expense.

10:10

📅 Calculating Insurance Expenses for 2020

The instructor proceeds to calculate the insurance expenses for 2020. For Policy M, nine months of coverage (April to December) results in an expense of $5,580. Policy N, with five months of coverage (August to December), leads to a $2,500 expense. Policy L, with two months of coverage (November and December), results in a $900 expense. Summing these gives a total insurance expense of $8,980. The remaining prepaid insurance at the end of 2020 is then calculated by subtracting the expenses from the total purchase, leaving $26,660.

15:15

📊 Insurance Expense Calculation for 2021

The instructor explains how to compute insurance expenses for 2021. For Policy M, three months of coverage lead to a $1,860 expense. Policy N, with 12 months of coverage, results in a $6,000 expense. Policy L, also with 12 months of coverage, generates a $5,400 expense. The total insurance expense for 2021 is $13,260. The prepaid insurance balance from the end of 2020, $26,660, is reduced by this expense, leaving $13,400 in prepaid insurance at the end of 2021.

📈 Prepaid Insurance and Expenses for 2022

The video now focuses on 2022. Policy M is fully expired by this year, and Policy N has seven months left, resulting in a $3,500 expense. Policy L has 12 months of coverage left, leading to a $5,400 expense. The total insurance expense for 2022 is $8,900. Subtracting this from the prepaid insurance balance of $13,400 leaves $4,500 in prepaid insurance at the end of 2022.

📆 Final Year: Insurance Expense for 2023

The instructor covers the final year, 2023. By this point, only Policy L remains, with 10 months of coverage, generating a $4,500 insurance expense. With no new purchases, and the prepaid insurance from 2022 totaling $4,500, this balance is fully used, leaving no prepaid insurance at the end of 2023. The instructor emphasizes the complete utilization of the prepaid insurance for that year.

📜 Review and Conclusion

In the concluding remarks, the instructor reviews the key process for solving prepaid insurance and insurance expense problems. The main takeaway is to carefully analyze how many months each policy has been used during a given period. The lesson presents a comprehensive scenario covering multiple years and policies, reinforcing the importance of understanding the relationship between insurance coverage periods and financial reporting. The next lesson will cover deferred revenues.

Keywords

💡Prepaid Insurance

Prepaid insurance refers to insurance premiums that are paid in advance before the coverage period begins. In the video, this concept is central to the discussion as the company pays for multiple insurance policies in advance. The video explains how the prepaid amount is reported in financial statements as an asset, with the portion that applies to future periods being categorized as prepaid insurance.

💡Insurance Expense

Insurance expense is the cost of insurance coverage that is allocated to a specific period. In the video, the presenter discusses how to calculate the insurance expense for different policies over multiple periods. The insurance expense is recorded on the financial statements as part of the operating expenses, representing the cost of the insurance used during the year.

💡Adjusting Entries

Adjusting entries are journal entries made at the end of an accounting period to update the accounts for any expenses or revenues that have been incurred but not yet recorded. In this video, adjusting entries are used to properly allocate the prepaid insurance to the correct periods, converting part of it into insurance expense.

💡Financial Statements

Financial statements are formal records of the financial activities and position of a company. In the video, the presenter focuses on how insurance expenses and prepaid insurance are reported in financial statements, particularly the balance sheet and income statement, by the end of each reporting period.

💡Policy M

Policy M is one of the three insurance policies purchased by the company. It costs 7,440 and runs from April 1, 2022, to March 31, 2021. The video uses Policy M as an example to explain how the prepaid insurance and insurance expenses are calculated and spread out over the policy’s duration.

💡Policy N

Policy N is another insurance policy purchased by the company, costing 12,000 and running from July 30, 2022. It is used as an example to demonstrate how insurance expenses and prepaid insurance are calculated over the duration of the policy.

💡Policy L

Policy L is the third insurance policy purchased by the company, costing 16,200 and running from November 1, 2022, to October 31, 2023. The video uses this policy to show how prepaid insurance and insurance expenses are calculated over multiple periods.

💡Expiration

Expiration in the context of the video refers to the end of the coverage period of an insurance policy. Once a policy expires, no more prepaid insurance is left for that policy. The video explains how to determine the amount of insurance expense for policies as they approach their expiration date.

💡Reporting Period

A reporting period is the specific time frame for which a company prepares its financial statements. In the video, the insurance expenses and prepaid insurance are calculated at the end of each reporting period, which is typically one year. The calculations involve determining how much of the prepaid insurance applies to the current period versus future periods.

💡Journal Entries

Journal entries are records of financial transactions in the company's accounting system. In the video, the presenter emphasizes the importance of adjusting journal entries to reflect the insurance expense and prepaid insurance correctly in the financial statements, based on the time the insurance was used.

Highlights

The lesson focuses on understanding prepaid insurance and insurance expense, especially in the context of advance payments.

The example involves calculating insurance expenses and prepaid insurance for three insurance policies purchased by a company.

The policies have different start and end dates, which requires adjusting entries for the financial statements.

Policy M is valued at 7,440 and runs from April 1, 2020 to March 31, 2021.

Policy N is worth 12,000 and runs from July 30, 2020 to July 30, 2022.

Policy L is valued at 16,200 and runs from November 1, 2020 to October 31, 2023.

The goal is to compute the insurance expense for each period and calculate the prepaid insurance balance at the end of each reporting period.

For the year 2020, the total prepaid insurance purchase was 35,640.

The insurance expense for 2020 is calculated by multiplying the policy amounts by the fraction of months they were active.

The total insurance expense for 2020 is 8,980, derived from policies M, N, and L.

The remaining prepaid insurance balance at the end of 2020 is 26,660.

In 2021, the same calculation method is applied, leading to an insurance expense of 13,260.

By the end of 2021, the prepaid insurance balance reduces to 13,400.

For the year 2022, the insurance expense is 8,900, and the prepaid balance at year-end is 4,500.

In 2023, the final insurance expense of 4,500 is calculated, and the prepaid insurance balance is zero as all policies expire.

Transcripts

[Music]

hello everybody so welcome to lesson 18

and today we will be discussing prepaid

insurance and insurance expense free

payments of insurance in the last video

we discussed the Bible adjusting entries

and your adjusting entry snap and sorry

failed expenses now we will have a more

complex example involving insurance

policies that are being paid for in

advance by a company and how will we be

able to get the insurance expense for

each period that is being affected and

their prepaid insurance that should be

reported in the financial statements

below please are reported in the

financial statements okay

so please do not forget to download the

handout in the link is given to you in

the description box okay German company

purchased the following insurance

policies policy and policy in and policy

here okay so are you ready to start

banana

okay so calculator okay so I said German

company has purchased three insurance

policies policy M policy and policy and

policy M is seven thousand four hundred

forty which will run from April 1 20 22

March 31 2021 policy n is 12,000 from

July 30 20 22 July 30 20 22 and then

policy L is 16200 from November 1 20 22

the same October 31 20 23 an issue

solved and then in this problem is how

much is the insurance expense and their

prepaid insurance at the end of each

reporting period that is being affected

by this insurance okay

so let's first compute coma Canyon tolet

and an abaya non company in 2020 see any

repayment so seven thousand four hundred

forty plus twelve thousand last sixteen

thousand two hundred okay so that

there's thirty five thousand six hundred

forty again I think thirty five thousand

six hundred forty okay again seven

thousand four hundred forty plus twelve

thousand plus sixteen thousand two

hundred eighty pushin thirty five six

point and then check nothing new

coverage go in on months part of our

dream of multiplying a fraction fraction

of time Omega okay April 1 20 22 March

31 2021 a sample onion so that is well -

okay and then July 30 2020 2022 so that

I that s two years or 24 months and in

the column on November 1 2020 of over

thirty one twenty two twenty three so in

poi

three years that is equivalent to 36

months

okay so now we're ready to solve

mechanic insurance expense and prepaid

insurance for each of the years that are

affected

let's start with the financial

statements for the year 2020 Athena

purple easy to check not in a lump

month's jnana-yoga witness upon the car

goes up on appeal okay

alum months not no insurance yanmega

government dependence at are all napela

yourself another twenty twenty eight Oh

a villa Half Moon and 2020 okay so far

we see him and policy a seven thousand

four hundred forty times they multiplied

in a day el agua national government

from 2020 nagabhushanam

April so April May June July August

September October and November December

April May June July August September

October November December so that is

nine months okay

so nine months unlike a gambit Manhattan

over twelve months

okay next policy and amun-ra is twelve

thousand times July 30 that is already

August 1 gallon Kazakh thingy equal

immune so on July 30 the August 1 and so

although September October November

December August September October

intervals

it's a hobby penitential five over

twenty people and then police al nothing

is sixteen thousand two hundred one a

shinigami from 2020 so this is November

and December two months now

okay so two over three pieces then get

this okay so seven thousand four hundred

forty times 9 over 12 will give you five

thousand five hundred eighty then twelve

thousand times five over twenty-four

will give you 2,500 and then sixteen

thousand two hundred times 2 over

thirty-six will give you nine hundred

and then get the that is your insurance

expense on December 31 2020 get the

total of the three five thousand five

hundred eighty plus 2500 plus 900 which

will give us eight thousand nine hundred

are you happy insurance expense for

twenty twenty second while I'll never

not even into mom what is a big negative

me okay yep another man you prepay lives

over runs on prepaid insurance Komaki do

not ever forget it's a longshot prepaid

insurance beginning May beginning

balance by abuela

so that is 0 they provide a papaya

insurance

then I've nothing you I think purchase

total purchase of insolence

Pagani purchased a mechanic ballina

excellence thirty five six forty so

thirty five thousand six hundred then

Baba was not in June expired in 2020

vanilla expires in 2020 at the pond 8989

up in my nose 8000 performed on Latino

population Union Maggie Airport not even

appear on insurance expects it so

prepaid insurance December thirty one

twenty twenty thirty five thousand six

hundred forty - 8950 35 640 - evening

he will give you twenty six thousand six

hundred six how much is the insurance

expense to be reported in the financial

statements on December 31 2020 and saga

8880 how much is the remaining balance

of prepaid insurance on December thirty

one twenty two twenty hours ago twenty

six thousand six hundred sixty we ready

to prepare for 2021 okay

same process elects insurance expects to

mikado new ngoz Poznan happen now or

becoming a on the expired

na insurance okay so we don't elect poly

cm policy N and policy okay seven

thousand four hundred forty times a lump

on Shinigami known 2021 check Numa booty

on expiration the I 2021 along instead

of Shinigami the 2021 January February

March three months Allah so multiply

anything equally okay policy n is twelve

thousand times

Alam one Shinigami known Twenty twenty

one twenty Twenty twenty twenty-two for

my expired visa va voom 2020

Monisha component when t21 de volta on

your editor of months

okay so 12 over 24 and then policy LS

16200 x el agua negra metal 2021 every

booth 20 21 days so 12 over 13

okay so performed on methane 7400 forty

times sleep over 12 1860 then 12,000

times 12 over 24 6000 and then 16200

times 12 over 36 5400 okay then

so that is your insurance expense on

December 31 2021 so let's just get the

1860 plus 6,000 plus 5400 will give you

13200 6 a my envelope is our prepaid

insurance propelled insurance December

31 2020 Champlain Valley last year equal

to Lula happened

twenty-six thousand six hundred sixty

well at our young new purchases over at

Ionia and so the Rachel entire less

expired in 2021 Macallan expire in 2021

at all 13200 six okay

so that is your prepaid insurance on

December 31 2021 so the perform l'm not

then twenty six thousand six hundred

sixty minus thirteen thousand two

hundred six twenty six thousand six

hundred sixty minus thirty inclusive fee

will give us 13 thousand okay so but

there are no how much is the insurance

expense on December thirty one twenty

twenty one thirteen thirty thousand four

hundred sixty in vino yeah

so casa andina Vanunu expense not 2021

and then determine how much is the

insurance prepaid insurance on December

31 2021 remaining balance 13400 okay

whenever I own next - okay - Renata fs4

2020 people

a sale process let's analyze policy em

policy and policy and policy em 7400 40

welcome on policy Amnon 2022 so nobody

nothing wha-hey okay policy in nomina

thing is 12,000 - Alam mods Shinigami

move 20 2000 people laugh okay so July

boss I thought they were very much April

May June July

I'm gonna announce a t1 so 7 over 24 and

in policy al naved 16200 elements

Shinigami man 2022 in and more when 2022

we deliver so going to multi garbage

sometimes well over 36 paper for London

Abimelech 12,000 times 7/4 which gives

us three thousand five hundred and then

sixteen thousand two hundred times 12

over 36 five thousand four

policy em because they last year without

expired Russia okay so this is your

insurance expense on December 31 2012

eat - okay

3,500 us 5,400 is 8,000 okay

totally not AIT's a prepaid insurance

prepaid insurance from last year

December 31 2021

they are thirteen thousand or hundred

again whether I am new purchases oma -

and Avenue likes fire this expired in

2022 who you

8900

okay so it's a for you prepaid insurance

December 31 2022 okay 13400 - 8900 will

give you four thousand five

how much is the insurance expense in the

financial statements on December 31 2022

8800 how much is the remaining balance

of prepaid insurance on December 31 2020

people 4,500 total offense at 2020

policy M policy and policy a policy M is

7404 teeth so experimentation 2021 5 a

2023 at all policy n is 12,000 felon

expiration of 2022 so a policy and

nomina policy Elmer Manhattan is 16200

son Allah Allah T there are policy no

2022 ice along one Shinigami move 2023

hunger don't you like our September 10

months and over 30 okay

16200 thanks then over 36 will give you

4500 it's like okay so insurance expense

December 31 2023 is 4500 I own my own

sock will be insurance

the big insurance from last year

December 31 2022 is 4,500 we have no new

purchases so less expired in 2023 which

is 4,500

so this is prepaid insurance December 31

2023 and unsurprisingly it is zero okay

but in zero nasha I said I wouldn't have

been you own insurance policy so if

again you will be asked how much is the

insurance expense of December 31 2023

the answer is 4500 how much is the

remaining balance of prepaid insurance

of December 31 2023 the answer is zero

okay so screenshot new money on video at

a on adding solution for this problem

okay so I hope that you understand how

we did things here so just as a quick

review no fun next result-item from

that's when we are solving problems

regarding insurance our mindset is that

how many months was this insurance was

to use during a certain period

you know usually questions will just ask

you about one year or the next year but

I presented all of these to you

what about eternal million thirty five

thousand six hundred forty I would

people think that lupus and then on

prepaid insurance that it is

automatically

I mean you prepaid insurance that it is

no booster - I know we say okay so I

hope that you understand our next

session would be about be fair grabbing

thank you

[Music]