Question

A company makes the payment of a one-year insurance premium of $4,224 on March 1, 2019.

b-1. Use the horizontal model to show the amount of insurance premium "used" that month. (Use amounts with + for increases and amounts with – for decreases.)

C. Calculate the amount of prepaid insurance that should be reported on the December 31, 2019, balance sheet with respect to this policy.

d. If the premium had been $8,448 for a two-year period, how should the prepaid amount at December 31, 2019, be reported on the balance sheet?

Non-current assets= ?

current assets= ?

Answer 1

b-1.

Accounting equation is the horizontal model.

Such equation is as below:

Assets = Liabilities + Capital

Since this is a one-year premium, the amount should be divided by 12 to get the premium used in the month.

Premium expense = $4,224 / 12 = $352

The premium expense decreases capital, since it reduces profit.

Required model:

Assets	=	Liabilities	+	Capital
				-352

C.

March to December is a gap of 10 months.

Since this is the month of December, 10 months have already expired and 2 months are remaining.

Prepaid insurance would be for 2 months.

Prepaid insurance = (Total payment / Number of months in a year) × Remaining months

                              = ($4,224 / 12) × 2

                              = $704 (Answer)

d.

Non-current assets: this would be the prepaid amount that exceeds more than 12 months. Two-year means (2 × 12 =) 24 months. Out of that 10 months (March to December of 2019) have expired and used. Months remaining are (24 – 10 =) 14 months. Therefore, months for non-current assets = 14 – 12 = 2 months.

Prepaid amount in non-current asset = (Total payment / Number of months in a two-year) × months for non-current assets

                              = ($8,448 / 24) × 2

                              = $704 (Answer)

Current assets: this would be the prepaid amount that doesn’t exceed 12 months.

Prepaid amount in current asset = (Total payment / Number of months in a two-year) × months for current assets

                              = ($8,448 / 24) × 12

                              = $4,224 (Answer)