Question

WidgetMakers LLC started business January, 01, 2010. They paid a $6,000 premium for insurance coverage on their inventory. The coverage expires June 01, 2010. At this time they renew for the remainder of the year by paying an additional premium of $7,700. What is the quarterly insurance expense that WidgetMakers should report for the period ending June 30,2010. Please explain to me how to do this. why do we multiply 6000 by 2 for april and may if it starts in january and then divide by 5 and same process with the 7700

Answer 1

Quarterly Insurance Expense that WidgetMakers should report for the period ending June 30 ,2010 , is comprised of two months(April and May) payment from the first payment and one month(June) from the second payment.

Insurance for April and May = ($6,000 * 2) / Total Months

Total months are January to May = 5

= $12,000 / 5

= $2,400

Insurance for June =($7,700 * 1) / Total months

Total months are June to December = 7

= $7,700 / 7

= $1,100

Total Insurance expense for the Quarter ending on June 30,2010 = $2,400 + $1,100 = $3,500

[NOTE: We are multiplying 6,000 by 2 because for April and May , though it starts in January because the insurance expenses are recorded on QUARTERLY basis . The first quarter ended on March 31 ,2010 and the portion of $3,600 (6,000 * 3 / 5) is already reported for ending period of March 31,2010 . Only the leftover portion of $2,400 ($6,000 - $3,600) is paid for the June ending quarter . Similarly out of $7,700 paid for 7 months , Only 1 month (June itself) falls in the second quarter hence only that portion is added with the April and May insurance expense to come at the total insurance expense for the quarter ending on June 30 ,2010]

{Note: If any confusion is still there , you can ask me in the comment section . Hope this will clear your doubts . Thank You :) . Kindly rate }