Question

On January 1, 2013, Craig Company paid the premium on a four-year insurance policy in the amount of $12,000. At that time, the full amount paid was recorded as prepaid insurance. After recording the correct adjusting entry for the insurance policy on December 31, 2015, Craig Company's records would reflect what balance in the prepaid insurance account?
A. $6,000
B. $9,000
C. $3,000
D. $4,000
E. $0

Answer 1

Answer:

option (C) $3,000

Explanation:

Data provided:

Policy duration = 4 years

Policy amount = $12,000

Date on which premium is paid = January 1, 2013

Date on which entry is adjusted = December 31, 2015

Now,

The time passed between January 1, 2013 to December 31, 2015 = 3 years

Therefore,

Amount to be recognized as insurance exp. on December 31, 2015

= $\ 12,000\times\frac{\textup{Time elapsed}}{\textup{Total policy duration}}$

= $\ 12,000\times\frac{\textup{3}}{\textup{4}}$

= $9,000

Thus,

The balance in the prepaid insurance account = $12,000 - $9,000 = $3,000

Hence,

The correct answer is option (C) $3,000