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Latta Company is making adjusting entries for the year ended December 31 of the current year. In developing information for the adjusting entries, the accountant learned the following:

A two-year insurance premium of $4,800 was paid on October 1 of the current year for coverage beginning on that date. The bookkeeper debited the full amount to Prepaid Insurance on October 1.
At December 31 of the current year, the following data relating to Shipping Supplies were obtained from the records and supporting documents.
Shipping supplies on hand, January 1 of the current year $ 13,000
Purchases of shipping supplies during the current year 75,000
Shipping supplies on hand, counted on December 31 of the current year 20,000

Required:
Record the adjusting entry for insurance at December 31 of the current year.

Note: Do not round intermediate calculations.

Record the adjusting entry for supplies at December 31 of the current year, assuming that the shipping supplies purchased during the current year were debited in full to the account Shipping Supplies.

Note: If no entry is required for a transaction or event, select "No journal entry required" in the first account field.

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[The following information applies to the questions displayed below.]

Latta Company is making adjusting entries for the year ended December 31 of the current year. In developing information for the adjusting entries, the accountant learned the following:

A two-year insurance premium of $4,800 was paid on October 1 of the current year for coverage beginning on that date. The bookkeeper debited the full amount to Prepaid Insurance on October 1.
At December 31 of the current year, the following data relating to Shipping Supplies were obtained from the records and supporting documents.
Shipping supplies on hand, January 1 of the current year	$ 13,000
Purchases of shipping supplies during the current year	75,000
Shipping supplies on hand, counted on December 31 of the current year	20,000

Required:
Record the adjusting entry for insurance at December 31 of the current year.

Note: Do not round intermediate calculations.

Record the adjusting entry for supplies at December 31 of the current year, assuming that the shipping supplies purchased during the current year were debited in full to the account Shipping Supplies.

Note: If no entry is required for a transaction or event, select "No journal entry required" in the first account field.

BlackTom AI · Accepted Answer

Insurance allocation: 4,800/24 months = $200 per month, so 3 months (Oct–Dec) = $600 expense; adjust Prepaid Insurance by $600.

1) Relevant knowledge points and concepts
- Prepaid (deferred) expenses are initially recorded as assets and must be expensed over the benefit period (matching principle).
- For supplies recorded as an asset account, the used portion equals beginning balance + purchases − ending physical count; that used portion is recognized as Supplies Expense (or Shipping Supplies Expense) by reducing the asset account.

2) Step-by-step reasoning and intermediate calculations — Insurance
- Total premium = $4,800 for 2 years = 24 months.
- Monthly insurance cost = $4,800 ÷ 24 = $200 per month.
- Coverage from Oct 1 to Dec 31 = 3 months consumed this year.
- Insurance expense to record = $200 × 3 = $600.
- Journal entry: Debit Insurance Expense $600; Credit Prepaid Insurance $600.
- Remaining Prepaid Insurance after adjustment = $4,800 − $600 = $4,200 (asset to be expensed in future periods).

3) Step-by-step reasoning and intermediate calculations — Shipping supplies
- Beginning shipping supplies on hand = $13,000.
- Purchases during year (debited to Shipping Supplies) = $75,000.
- Book (account) balance before adjustment = $13,000 + $75,000 = $88,000.
- Physical count on Dec 31 = $20,000 (ending supplies on hand).
- Supplies used (expense) = $88,000 − $20,000 = $68,000.
- Journal entry: Debit Supplies Expense $68,000; Credit Shipping Supplies $68,000.

4) Why the correct answers are correct
- The insurance entry recognizes only the portion of the prepaid asset that was consumed (3 months), matching expense to the period.
- The supplies entry converts the used portion of the asset into an expense based on the physical count and recorded purchases, ensuring asset balance reflects actual supplies on hand.

5) Why common incorrect alternatives are wrong (brief)
- Recording the full $4,800 as Insurance Expense would violate the matching principle and overstate expense this year.
- Charging only one month ($200) or two months ($400) would understate expense for the three-month period Oct–Dec.
- For supplies, recording $75,000 as expense ignores the beginning inventory; recording no entry would overstate asset and understate expense. Using $68,000 correctly reflects beginning + purchases − ending.

6) Conclusion
The proper adjusting entries are: Debit Insurance Expense $600; Credit Prepaid Insurance $600, and Debit Supplies Expense $68,000; Credit Shipping Supplies $68,000 — matching the provided answers.

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