Lesson 018 - Adjusting Entries 2: Prepaid Expenses (Insurance)
Summary
TLDRThis 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
🎓 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.
📝 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.
📅 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.
📊 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.
Mindmap
Keywords
💡Prepaid Insurance
💡Insurance Expense
💡Adjusting Entries
💡Financial Statements
💡Policy M
💡Policy N
💡Policy L
💡Expiration
💡Reporting Period
💡Journal Entries
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]
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