Question

On July 1, a company paid the $4,800 premium on a one-year insurance policy with benefits beginning on that date. What will be the insurance expense on the annual income statement for the first year ended December 31?

Answer 1

Answer:

$2,400

Explanation:

First divide $4,800 by 12 = $400 per month. Since the company paid the insurance premium on July 1, it must recognize $2,400 (= $400 x 6) as insurance expense for the July - December period. The remaining $2,400 must be recorded under the Prepaid Insurance account which is an asset account in the balance sheet.