Question

Eve's Apples opened for business on January 1, 2021, and paid for two insurance policies effective that date. The liability policy was $43,200 for 18 months, and the crop damage policy was $28,800 for a two-year term. What was the balance in Eve's Prepaid Insurance account as of December 31, 2021?

Answer 1

Answer:

$28,800

Explanation:

When an insurance policy or cover is paid for in advance, the entries posted are debit prepaid insurance and credit cash account.

As the insurance cover expires, the prepaid insurance account is credited and the insurance expense account is debited. Hence, the balance in the prepaid insurance account is the net of the debits and the credits so described.

For the liability policy, one year cover to be expensed

= 12/18 × $43,200

= $28,800

Balance left = $43,200 - $28,800

= $14,400

For the crop damage policy,

one year cover to be expensed

= 12/24 × $28,800

= $14,400

Balance left = $28,800 - $14,400

= $14,400

The balance in Eve's Prepaid Insurance account as of December 31, 2021

= $14,400 + $14,400

= $28,800