Question

The acquisition expenses for taxes, policy issue, expenses, etc. are $480 for a 1-year policy. If the policy is effective January 1, what amount would be shown on the GAAP income statement as acquisition expenses as of January 31?

Answer 1

For a 1-year insurance policy with acquisition expenses of $480, the monthly amortized acquisition expense under GAAP is $40. By January 31, $40 would be shown on the income statement as acquisition expenses.

Step-by-step explanation:

Under Generally Accepted Accounting Principles (GAAP), expenses should be matched with the revenues they help to generate. In the scenario provided, the acquisition expenses total $480 for a policy effective from January 1 for one year. As such, these expenses should be recognized proportionally over the policy period.

Since the policy covers an entire year, the monthly amortized expense is calculated by dividing the total acquisition expense by 12 (months). Therefore, we divide $480 by 12, resulting in $40 monthly. By January 31, only one month of policy coverage has elapsed, so the expense shown on the GAAP income statement for acquisition expenses should be $40.