Question

Zhu received a bill for insurance for his new business. The business was set up on 1st March 20X7 and it was decided that the first year end for accounting purposes would be 30th November 20X7. The bill for insurance totalled £1,950. It was for the period running from the start of the business to the end of March 20X8.

But Zhu didn't pay it until 30th September 20X7.

How much should be included as a prepayment for the first set of accounts?

Answer 1

The prepayment for the first set of accounts should be £877.50.

Step-by-step explanation:

The prepayment for the first set of accounts should be calculated based on the period from the start of the business to the end of November 20X7, which is the first year end for accounting purposes. Since the insurance bill covers the period from the start of the business to the end of March 20X8, the prepayment should only include the portion of the bill that relates to the period up until the end of November 20X7.

To calculate the prepayment, we need to determine the number of months between the start of the business (1st March 20X7) and the end of November 20X7. This is 9 months (March to November).

The insurance bill of £1,950 covers a period of 20 months (from the start of the business to the end of March 20X8). Therefore, the prepayment for the first set of accounts would be:

Prepayment = (9 months / 20 months) * £1,950 = £877.50