Accounting question, journal entry error regarding prepaid insurance

Question

I am struggling to find what exactly is wrong about these journal entries? All the other examples I've looked up look the exact same. Please advise! Thanks. 

 

 

Assume that you are the chief accountant at a small service company that prepares financial statements on December 31 of each year. You have a new staff member, Bethany Johnson, who is tasked with preparing journal entries for the company. While reviewing Bethany's work, you come across the following scenario.

On June 1, 2009, the company paid for property insurance on a newly purchased building. The insurance expires on May 31, 2010. Bethany recorded the following two journal entries regarding the insurance.
---------------------------------------------------------------
6/1/09 Prepaid Insurance 3,600
Cash 3,600
5/31/10 Insurance Expense 3,600
Prepaid Insurance 3,600
---------------------------------------------------------------
Write a memo to Bethany explaining the error that she made. In your memo, discuss the general purpose of adjusting journal entries, the financial statement effects of her error, and the proper entry that should have been made.

Answer 1

Bethany,

I would like to discuss the journal entry you made and its effect on the financial statements.

While this may not have been your intent, the journal entry mismatched expenses to the benefited periods – thus violated Generally Accepted Accounting Principles (GAAP) and misstated earnings in two periods.

Your journal entry expensed twelve months – a year’s worth of insurance – in a single month. Thus the earnings for ’09 were overstated by not expensing the proper amount of expired insurance (June through Dec) and the earnings for ’10 were understated by the same reason – not expensing the proper amount of insurance expired – five months for Jan through May instead of the full twelve months being expensed on a single day, May 31^st.

The proper entry would be 1/12^th or $300 a month for an even amount to be expensed over the expected life of the insurance coverage.

Thanks,

John