What is the present discounted value of $10,000 that is to be received in 2 years if the market rate of interest is 4 percent?
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Answer:
31 Dec Expense A/c Dr. $5,400
To Prepaid Expense A/c $5,400
(Therefore, expense for the current financial year recorded)
Explanation:
We know that at the time of insurance paid in advance on 1 April for 2 years, entry was;
Prepaid Insurance A/c Dr. $14,400
To Cash A/c $14,400
Now at year end the expense relating to current period shall be recognized properly in the books, so that matching principle of revenue against expenses shall be matched.
Thus, period from 1 April to 31 December = 9 months
Expense for 9 months =
That means expense for the year = $5,400
Therefore, entry for such recording will be:
31 Dec Expense A/c Dr. $5,400
To Prepaid Expense A/c $5,400
(Therefore, expense for the current financial year recorded)