Question

On June 15, 2017, the city acquired and paid for an insurance policy that cost 300,000. The policy covers the two-year period beginning July 1st. (12,500): Record the purchase.

Answer 1

The city's acquisition of a $300,000 insurance policy covering a two-year period should be split between Insurance Expense for the first fiscal year and Prepaid Insurance, an asset account, with any remaining amount applicable to subsequent fiscal year(s).

Step-by-step explanation:

The student's question is related to recording an insurance policy transaction for accounting purposes. On June 15, 2017, a city acquired and paid for an insurance policy costing $300,000, which covers a two-year period starting from July 1st. Here's how the purchase should be recorded:

• Debit Insurance Expense for the amount that pertains to the current fiscal year.
• Credit Cash or Cash Equivalents for the full payment of $300,000.
• Debit Prepaid Insurance (an asset account) for the portion of the insurance premium that applies to the following fiscal year(s).

Since the policy covers a two-year period, the $300,000 cost is not all expensed in one year. For accounting and matching principle purposes, the premium should be divided over the term of the policy, with the amount applicable to the current fiscal year charged as an expense and the rest recorded as a prepaid asset.