General Facts:

Company A buys casualty insurance from Insurer Co. The insurance premium is $12,000 for the year ($1,000 per month). Company A signs the casualty insurance policy on May 1, Year 1, for the one-year period from May 1, Year 1 through April 30, Year 2. Both Company A and Insurer Co. report on a financial year ending December 31. Both Company A and Insurer Co. record adjusting journal entries only at the end of their respective financial years.

Additional Facts Fact Pattern #1: (The facts below are in addition to the General Facts, above.)

Company A signs the casualty insurance policy on May 1, Year 1. Under the terms of the insurance policy, Company A is required to pay (unrealistically) its insurance premium with a single $12,000 payment at the end of the insurance policy term (i.e., April 30, Year 2). Company A pays the $12,000 insurance premium in cash on April 30, Year 2.

1. On May 1, Year 1, Company A will make an operating journal entry reflecting the following:

a. Credit Insurance Payable for $12,000. b. Debit Prepaid Insurance Expense for $12,000. c. Debit Insurance Expense for $12,000. d. Company A will not need to make an operating journal entry on May 1, Year 1.

2. On December 31, Year 1, Insurer Co. will make an adjusting journal entry reflecting the following:

a. Credit Insurance Revenue for $12,000. b. Credit Insurance Revenue for $8,000. c. Credit Insurance Receivable for $8,000. d. Insurer Co. will not need to make an adjusting journal entry on December 31, Year 1 to account for revenue earned under the insurance policy with Company A during Year 1.

New Additional Facts Fact Pattern #2: (The facts below are in addition to the General Facts, above, but not those additional facts in Fact Pattern #1.)

Company A signs the casualty insurance policy on May 1, Year 1. Under the terms of the insurance policy, Company A is required to pay (somewhat unrealistically) its insurance premium with a single $12,000 payment at the beginning of the insurance policy term (i.e., May 1, Year 1). Company A pays the $12,000 insurance premium in cash on May 1, Year 1.

3. On December 31, Year 1, Insurer Co. will make an adjusting journal entry reflecting the following:

a. Credit Insurance Receivable for $8,000.

b. Credit Insurance Revenue for $12,000.

c. Debit Prepaid Insurance Revenue for $8,000.

d. Debit Prepaid Insurance Revenue for $7,000.

e. Insurer Co. will not need to make an adjusting journal entry on December 31, Year 1 to account for revenue earned under the insurance policy with company A during year 1.

4. May 1, Year 1, Company A will make an operating journal entry reflecting the following:

a. Debit Insurance Expense for $12,000.

b. Debit Cash for $12,000.

c. Debit Prepaid Insurance Expense for $12,000.

d. Company will not need to make an operating journal entry on May 1, Year 1.