Question

On April 30, 2011, a three year insurance policy was purchased with a cash payment of $18,000. Coverage began immediately. What is the amount to be reported on the balance sheet as Prepaid Insurance at December 31, 2011?

Answer 1

The amount to be reported on the balance sheet as Prepaid Insurance at December 31, 2011, would be $4,000.

Step-by-step explanation:

The amount to be reported on the balance sheet as Prepaid Insurance at December 31, 2011, can be calculated by determining the portion of the policy that has been used up or expired. Since the policy covers a period of three years, and it was purchased on April 30, 2011, at December 31, 2011, only eight months of the policy have been used (from May to December). So, we need to calculate the portion of the policy that covers eight months out of the total three years.

To find the percentage of the policy used, we can divide the number of months that have passed (8) by the total number of months in three years (36). Then, multiply this percentage by the total cash payment made for the policy ($18,000) to find the amount that has been used up.

In this case, the amount to be reported on the balance sheet as Prepaid Insurance at December 31, 2011, would be:

$18,000 * (8/36) = $4,000