Question

Prepaid Expense On December 15, Company B paid $18,000 for a six-month insurance policy starting on that day. How much should Company B show as Insurance Expense for the year ended December 31? What will be the balance of Prepaid Insurance at the end of the year?

Answer 1

The insurance expense for Company B for the year ended December 31 is approximately $1,548, which represents the coverage for 16 days of December. The remaining Prepaid Insurance balance at year-end is $16,452, representing coverage for the upcoming months.

Step-by-step explanation:

Company B paid $18,000 for a six-month insurance policy on December 15, covering the period up until June 15 of the following year. To determine the Insurance Expense for the year ended December 31, we must calculate the expense for the portion of the policy that applies to that period only. Since the policy covers six months, the monthly cost is $18,000 divided by 6, which equals $3,000 per month. As there are 16 days of coverage in December (from December 15 to December 31), the expense for December would be (16/31) * $3,000. The Prepaid Insurance balance on December 31 will be the remaining amount that covers the future period.

The insurance expense for the year ended December 31 is, therefore, approximately $1,548 (rounded to the nearest dollar), and the remaining prepaid insurance is $16,452 ($18,000 total policy cost minus $1,548 expense recognized in December).