Eve's Apples opened its business on January 1, 2027, and paid for two insurance policies effective that date. The policy for equipment damage was $37,260 for 18 months, and the crop damage policy was $12,600 for a two-year term. What is the balance in Eve's prepaid insurance as of December 31, 2027?

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BlackTom AI · Accepted Answer

We start by identifying the two insurance policies and their terms, since prepaid insurance is amortized over time as the benefits are received.
Policy 1 (equipment damage): cost = 37,260 for 18 months starting Jan 1, 2027.
- Monthly amortization = 37,260 ÷ 18 = 2,070 per month.
- From Jan 1, 2027 through Dec 31, 2027 is 12 months of usage.
- Insurance expense for 2027 = 2,070 × 12 = 24,840.
- Remaining prepaid at Dec 31, 2027 for this policy = 37,260 − 24,840 = 12,420.
Policy 2 (crop damage): cost = 12,600 for 24 months (two-year term).
- Monthly amortization = 12,600 ÷ 24 = 525 per month.
- For 2027 (12 months), expense = 525 × 12 = 6,300.
- Remaining prepaid at Dec 31, 2027 for this policy = 12,600 − 6,300 = 6,300.
Now combine the remaining prepaid balances from both policies:
- 12,420 (equipment policy) + 6,300 (crop policy) = 18,720.
Thus, the balance in Eve’s prepaid insurance as of December 31, 2027 is 18,720.

Evaluating the provided options:
- Option $15,570: This would imply less prepaid remaining than calculated, perhaps by misallocating months or miscalculating monthly amortization; however, the correct monthly amortizations are 2,070 for 18 months and 525 for 24 months, leading to the 18,720 total.
- Option $43,740: This would reflect summing the full policy costs (or overestimating the prepaid) without considering amortization over time.
- Option $18,720: This matches the detailed month-by-month amortization for both policies and their remaining balances.
- Option $49,860: This greatly overstates prepaid by treating the entire costs as remaining prepaid without recognizing that portions have been expensed in 2027.

In summary, applying the proper straight-line amortization to each policy over its term yields a total prepaid balance of 18,720 on December 31, 2027. The other amounts arise from incorrect allocation of months or misunderstanding of expensing vs. prepaying.

Eve's Apples opened its business on January 1, 2027, and paid for two insurance policies effective that date. The policy for equipment damage was $37,260 for 18 months, and the crop damage policy was $12,600 for a two-year term. What is the balance in Eve's prepaid insurance as of December 31, 2027?

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