On july 1, 2017, ling co. pays $7,440 to pina colada corp. for a 2-year insurance contract. both companies have fiscal years ending december 31. for ling co., enter the july 1 transaction and the december 31 adjustment in the tabular summary that follows. (if a transaction results in a decrease in assets, liabilities or stockholders' equity, place a negative sign (or parentheses) in front of the amount entered for the particular asset, liability or equity item that was reduced.)

For Ling Co., we have the following transaction recording in their accounting book:

* July 1st 2017 transaction, the journal entry is:

Dr Prepaid Insurance              7,440

Cr Cash                                   7,440

( to record purchased and paid of 2-year insurance)

* For December 31st 2017, the adjustment transaction relating to Insurance Expenses:

Dr Insurance Expenses            1,860

Cr Prepaid Insurance               1,860

( to record insurance expenses for the second-half of 2017)

Working note: As the insurance is for 2-year, the Insurance expenses for one-year is 7,440/2 = $3,720; subsequently, the Insurance expenses for half-year is 3,720/2 = $1,860. Because as at December 31st 2017, the insurance policy has been passed by 6 months, Insurance expenses is recorded ( Dr) at half-year cost while Prepaid Insurance - an asset account recording Insurance fee paid yet not consumed fully - is Credited by the same amount to show how much Insurance fee has actually incurred.

So, the Asset account is decreased by $1,860 through the December 31st 2019 adjustment.

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