Question

On April 1, a company paid the $3,750 premium on a three-year insurance policy with benefits beginning on that date. What amount of the insurance expense will be reported on the annual income statement for the year ended December 31?

Answer 1

Answer:

$937.50

Explanation:

The Income Statement uses the accruals accounting concept when recording expenses. This concepts state that expenses must the recognized in the period in which they occur. This also applies to revenue or income.

What this means is that for this three-year insurance policy, we will be recognizing as an expense, that portion which has been incurred from the date of purchase to the end of the first financial period that is 9 months.

Calculation of the amount of the insurance expense will be reported on the annual income statement :

Insurance Expense =  $3,750 × 9/36

                                = $937.50

I have converted 3 years (36 months) to months to deal with months only so as to make it easy for apportionment.