On July 1, Crowe Co. pays $15,000 to Zubin Insurance Co. for a 3-year insurance policy. Both companies have fiscal years ending on December 31. For Crowe Co., journalize the entry on July 1 and the adjusting entry on December 31. Using the provided information, also journalize the entry on July 1, and the adjusting entry on December 31 for Zubin Insurance Co. Zubin uses the accounts Unearned Service Revenue and Service Revenue. Journal Entries for Crowe Co.: On July 1: Dr. Prepaid Insurance $15,000 Cr. Cash $15,000 On December 31 (adjusting entry): Dr. Insurance Expense $2,500 Cr. Prepaid Insurance $2,500 (Note: $15,000/36 months = $416.67 per month, $416.67 * 6 months (July to December) = $2,500) Journal Entries for Zubin Insurance Co.: On July 1: Dr. Cash $15,000 Cr. Unearned Service Revenue $15,000 On December 31 (adjusting entry): Dr. Unearned Service Revenue $2,500 Cr. Service Revenue $2,500 (Note: Same calculation as for Crowe Co., recognizing 6 months of the policy term.)

For Crowe Co., the prepaid insurance is considered an asset because it represents a future economic benefit. When Crowe Co. pays $15,000 on July 1 for a 3-year insurance policy, it needs to recognize this payment not as an immediate expense but as an asset that will be expensed over the period of benefit.

**Journal Entries for Crowe Co.:**

On July 1: - Dr. Prepaid Insurance $15,000 - Cr. Cash $15,000 (This entry records the payment of cash for the insurance policy, which is then recorded as a prepaid asset.)

On December 31 (adjusting entry): - Dr. Insurance Expense $2,500 - Cr. Prepaid Insurance $2,500 (This adjusting entry allocates the cost of the insurance expense over the period used. Since 6 months of the insurance have elapsed, $2,500 of the prepaid insurance is expensed.)

**Journal Entries for Zubin Insurance Co.:**

For Zubin Insurance Co., which issues the policy, the $15,000 received is not recognized as revenue immediately but is recorded as a liability since it represents service to be provided over the term of the insurance policy.

On July 1: - Dr. Cash $15,000 - Cr. Unearned Service Revenue $15,000 (This entry records the receipt of cash, which is recognized as a liability in the form of unearned service revenue.)

On December 31 (adjusting entry): - Dr. Unearned Service Revenue $2,500 - Cr. Service Revenue $2,500 (This adjusting entry recognizes the revenue pertaining to the services provided in the current accounting period, thus reducing the liability and recording the revenue earned.)

Extra: In accounting, the concepts of accruals and deferrals are integral parts of the adjusting process. Accruals involve recognizing revenues and expenses that have been earned or incurred but not yet recorded in the accounts, while deferrals are expenses or revenues that are recorded but not yet earned or incurred.

Prepaid insurance for Crowe Co. represents a deferral. The company paid for an expense in advance, which is gradually recognized over the term of insurance coverage. This is an application of the matching principle, where expenses are matched with the revenues they help generate, recognized over the period benefited.

For Zubin Insurance Co., unearned service revenue is a liability initially recognized when cash is received, reflecting the company's obligation to provide services (in this case, insurance coverage) in the future. Over time, as the service is provided, this liability is decreased and revenue is recognized, in line with the revenue recognition principle that states that revenues should be recognized when they are earned, regardless of when the cash is received.