Question

ambiance corporation began operations on January 1, Year 1. During the month of January, the company operated without insurance coverage. Then, on February 1, the company paid the $4,800 premium on a two-year insurance policy with benefits beginning on that date. The company uses the accrual basis. How much insurance expense will be reported on the company's income statement for the year ended December 31, Year 1?

Answer 1

Answer:

The insurance expense for year 1 is $2,200.

Explanation:

The insurance expense for the year 1 is $2,200, which is for 11 months in the first year.  The balance of $2,600 will be carried forward to the next year as prepaid insurance.  The first entry is a debit to the Prepaid Insurance account for the sum of $4,800 and a credit to the Cash account for the same amount, in order to record the cash payment.  In year 1, Insurance Expense account will be debited with $2,200 while Prepaid Insurance will be credited with the same amount, in order to record the expense.