On July 1, 2020, Cheyenne Corp. pays $21,900 to Kalter Insurance Co. for a 3-year insurance contract. Both companies have fiscal years ending December 31. For Cheyenne Corp., journalize and post the entry on July 1 and the annual adjusting entry on December 31.

For Cheyenne Corp., journalize and post the entry on July 1 and the adjusting entry on December 31.

Journalize and post the entry on July 1:

Debit Prepaid Insurance $21,900

Credit Cash $21,900

The annual adjusting entry on December 31:

On December 31, 2020:

Debit Insurance Expense $3,650

Credits Prepaid Insurance $3,650

On December 31, 2021:

Debit Insurance Expense $7,300

Credits Prepaid Insurance $7,300

On December 31, 2022:

Debit Insurance Expense $7,300

Credits Prepaid Insurance $7,300

On December 31, 2023:

Debit Insurance Expense $3,650

Credits Prepaid Insurance $3,650

Explanation:

On July 1, 2020, Cheyenne Corp. pays $21,900 in advance for 3 year insurance contract. The company records the insurance as the prepaid Insurance:

Debit Prepaid Insurance $21,900

Credit Cash $21,900

Insurance expense per year = $21,900/3 = $7,300

On December 31, 2020 the last day of the following 6 months, the company records an adjusting entry:

Debit Insurance Expense $3,650 (=$7,300/12x6 = $3,650)

Credits Prepaid Insurance $3,650

On December 31, 2021:

Debit Insurance Expense $7,300

Credits Prepaid Insurance $7,300

On December 31, 2022:

Debit Insurance Expense $7,300

Credits Prepaid Insurance $7,300

On December 31, 2023:

Debit Insurance Expense $3,650

Credits Prepaid Insurance $3,650