Question

On June 30, a company purchased 1 year of insurance coverage which started immediately, paying cash of $2,400. The company's year end is 12/31. Choose the true statement.

a. On June 30, cash would be debited for $2,400.
b. On the Income Statement for the year, insurance expense will be $1,200.
c. On the Balance Sheet at the end of the year, prepaid insurance will be $2,400.
d. On the Balance Sheet at the end of the year, prepaid insurance will be a non-current asset.

Answer 1

On June 30, the cash account would be credited, and prepaid insurance debited for $2,400. By the year-end, half of this amount would be expensed, leaving $1,200 as prepaid insurance on the Balance Sheet, which is a current asset.

Step-by-step explanation:

The student's question relates to the accounting treatment of insurance premium payments and their reflection in financial statements. The possible answers involve understanding the nature of the transaction and accounting principles like expense recognition and asset classification.

Regarding the provided options:

1. On June 30, cash would be debited for $2,400: This statement is true. When paying for the insurance, the company would use cash, so cash decreases. The entry is a debit to Prepaid Insurance (an asset account) and a credit to Cash.
2. On the Income Statement for the year, insurance expense will be $1,200: This statement is true. Only six months of the insurance premium will be expensed in the current year (July-December), which amounts to $1,200 (6/12 of $2,400).
3. On the Balance Sheet at the end of the year, prepaid insurance will be $2,400: This statement is false. It will be $1,200 since the other half would have been recognized as an expense for the year.
4. On the Balance Sheet at the end of the year, prepaid insurance will be a non-current asset: This statement is false. Prepaid insurance is classified as a current asset because it will be used up within a year from the Balance Sheet date.