Answer:
$60,000
Explanation:
Since Bailey Co. changed their accounting for insurance expense from the cash-basis to the accrual-basis in the current year, and in January of the prior year, Bailey recorded insurance expense of $240,000 for the cash purchase of a four-year insurance policy.
Bailey should report the insurance transaction in the current year's financial statements of an amortization of the insurance expense over the four year period, and take account the portion that pertains to the current year.
Therefore = $240,000 / 4 years = $60,000 per year
Answer:
Bailey must adjust three accounts:
First we will start to adjust retained earnings: since retained earnings were underestimated in the past year because $180,000 more of insurance expense was recorded, then we must increase it by $180,000.
Since the insurance will cover this year plus two more years, we must record two years worth of prepaid insurance = $60,000 x 2 = $120,000
Finally we must record the insurance expense for this year = $60,000
The adjusting entry will be:
Dr Insurance expense 60,000
Dr Prepaid insurance 120,000
Cr Retained earnings 180,000
