Question

Which of the following statements is false? Multiple Choice Prepaid insurance is a deferred expense. Prepaid insurance represents a future economic benefit. Prepaid insurance is shown on the income statement. Prepaid insurance indicates that a company has already paid cash for insurance coverage that protects the company for some future time period.

Answer 1

Answer:

B. Prepaid insurance is shown on the income statement

Explanation:

Prepaid insurance first and foremost is a current asset and as such will not reflect in the income statement but in the statement of Financial Position or Balance Sheet.

Although, prepaid insurance will be shown as paid within the year, it must be deducted from the insurance premium paid for the current year and then reported in the balance sheet as a current asset.

Prepaid insurance is treated as a current asset because it is an indication of insurance premiums paid for by the company in advance. It is a payment for economic benefits that will be enjoyed in the future, therefore it is a current asset. The only part of an insurance premium that shows in the income statement is the insurance expense paid for insurance benefit enjoyed in the current period