Final answer:
Smart Touch Learning should not record the entire $2,400 as an Insurance Expense on June 1. Instead, they should record $400 each month as part of the accrual basis accounting method. Initially, the payment is recorded as a prepaid expense, and then expense is recognized monthly.
Step-by-step explanation:
The statement that Smart Touch Learning would record Insurance Expense of $2,400 on June 1 under the accrual basis method is false. Under the accrual basis accounting, expenses are recorded when they are incurred, not necessarily when they are paid. In this case, the $2,400 prepayment represents insurance coverage for the next six months. Therefore, the company should record an Insurance Expense of $400 each month for the duration of the coverage period. On June 1, Smart Touch Learning would initially record the payment as a prepaid expense, which is an asset, and then recognize $400 each month as Insurance Expense to reflect the insurance cost for that month.
A simplified example of how insurance works can elucidate this principle. If each of the 100 drivers pays a $1,860 premium each year, the insurance company will collect the $186,000 that is needed to cover the costs of the accidents that occur. This example showcases the concept of matching revenue with expenses and how it applies to insurance premiums and accident costs, similar to how Smart Touch Learning should match its insurance expenses with the period they cover.