Question

On August 1 of Year 1 Presco Enterprises paid $1,200 cash for an insurance policy that would provide protection for a one year term. The company's fiscal closing date is December 31. Based on this information, the amount of insurance expense appearing on the Year 1 income statement would be

A. $1,200

B. $900

C. $700

D. $500

Answer 1

The amount of insurance expense appearing on the Year 1 income statement would be $500 (option D).

Step-by-step explanation:

The amount of insurance expense appearing on the Year 1 income statement would be $500 (option D).

Since the insurance policy covers a one-year term and the fiscal closing date is December 31, Presco Enterprises only needs to account for the insurance expense for the remaining months of the year, which is 5 months (August to December).

The monthly insurance expense can be calculated by dividing the total cost of the insurance policy by the number of months it covers: $1,200 / 12 = $100. Then, multiply this monthly expense by the remaining months of the year: $100 x 5 = $500. Therefore, the insurance expense appearing on the Year 1 income statement is $500.