 Hello and welcome to this session. This is Professor Farhad in which we would look at a prepaid adjustment or a prepaid exercise that's going to illustrate the concept of prepaid assets or prepaid insurance. Let's go ahead to take a look at this problem to see how we solve a problem like this. So the question is, what is the total amount of insurance paid by Adam Company during year two? Now this exercise initially looks very intimidating. But once we break it down into various pieces, you will see as long as you understand the basics, you should be good to go on the CPA exam. So let's look at the problem. Adam's accounting system debit all insurance to prepaid. Simply put, we have a prepaid account. I'm going to abbreviate it as PP prepaid. For interim financial reports, Adam adjust monthly estimated charges to insurance expense with a credit to insurance to a credit with credits to prepaid insurance. Simply put, when we need to adjust our financial statements, what's going to happen is this, we are going to credit, we're going to credit prepaid insurance. And obviously the prepaid insurance becomes insurance expense, it expires additional information for the year ended December 31st year two is as follow. So here they're giving you a bunch of information and they're asking you how much did Adam purchase in insurance during year two. Okay, let's take a look at what we have prepaid insurance at December 31st year one. So this is at the end of year one, which is the beginning of year two. Simply put, the beginning balance is 100,000 charges to insurance expense during year two is 430. It means we reduce prepaid by 430,000. If we reduce it, if we credited prepaid, that means it went to insurance expense, we expensed this amount. And this included the year and adjustment. That's fine prepaid insurance at December 31st year two is 120. And basically we end up the account the year with 120,000. And the question is, what was the total amount of insurance premium paid? Remember, every time we buy insurance, we debit prepaid insurance. So simply put, what the question is asking us is, what was the amount that we purchased here? Because think about it, if you have 100,000 of prepaid and you credited 430, you must have purchased some amount. So simply put, this becomes a simple financial accounting one on one equation, which is the beginning balance of 100,000 plus what you purchased minus what you used should equal to your ending prepaid insurance. Simply put, so here's what we're looking at 100,000 plus x, which is we don't know minus 430 equal to 120. Now solve for x. Now if we solve for x, x should be 450,000. So the answer should be 450,000. And you could always confirm this, you can take 100,000 plus 450 minus 430 should give us 120. And this is how we know how much we how much we paid for insurance. Now what should you do? How should you learn these adjustments? Go to farhatlectures.com or I have additional questions plus additional illustration that's going to show you how to approach problems on the CPA exam. Now on the exam itself, you could have A, B, C, D and you could have four answers. And the answer will be there. Or I can turn I can turn this exercise into an intimidating simulation by rather than telling you prepaid was 100,000. I can show you for example, the journal entries, I can show you the general ledger for prepaid and showing you its 100,000 charges to insurance expense 430. I don't give you this information. I'll either give you the journal entry or I'll give you the general journal, a copy of it. Or I could also tell you the prepaid insurance, I can give you everything in the form of a journal or a general journal for the prepaid insurance and you'll have to figure things out or you could be given this information as clean as in this exercise. Regardless, once you understand how to approach a prepaid asset problem, they all work the same way. Now this prepaid could be prepaid rent, this prepaid could be supplies. So supplies is a form of prepaid, this prepaid could be prepaid insurance, prepaid interest, any old prepaid work the same way. I hope this is helpful. Good luck, study hard, visit farhatlectures.com for additional material and stay safe.