Question

Catrina Corporation took out a new insurance policy on their recently built offices. The policy cost $240,000 and covered 24 months, from Oct 1, 20X1 to the end of Sep 20X3. When Catrina prepares its balance sheet at year-end 20X1, what amount will be shown as prepaid insurance?  

Answer 1

Solution:

Prepaid Insurance is the amount of Insurance premium that is paid in advance, i.e, before it has become due.

As per the Information given in the question we have

Insurance Premium paid for a period of 24 months = $ 240,000    ( Total policy cost )

( i.e., Insurance Premium paid for the period Oct 1, 20X1 to the end of Sep 20X3 )

Thus Insurance premium cost per month for each of the 24 months = $ 240,000 / 24 = $ 10,000

When Catrina prepares its balance sheet at year-end 20X1, only three months of the Insurance premium paid expires. ( i.e., Oct 20X1, Nov 20X1, Dec 20X1 )

Thus the Insurance premium payment to be recognized as cost as at the balance sheet at year-end 20X1 = $ 10,000 * 3 = $ 30,000

The Balance amount of Insurance Premium for the Period Jan 1, 20X2 to Sept, 30 20X3 ( 21 months ), which is the unexpired cost will be treated as prepaid Insurance,

The amount recognized as prepaid Insurance =Total Policy Cost – Amount of cost recognized at the balance sheet at year-end 20X1

= $ 240,000 - $ 30,000 = $ 210,000           

The amount that should be shown as prepaid Insurance, when Catrina prepares its balance sheet at year-end 20X1 = $ 210,000