If a company pays a 12-month insurance premium for $2,400 on 1 June 2021, then at 30 June 2021 the accounts will show:

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Question restatement: A company pays a 12-month insurance premium of $2,400 on 1 June 2021. By 30 June 2021, what will the accounts show?

Option given: a. A prepayment of $2,200 in the balance sheet and an insurance expense of $200 in the profit and loss account.

Analysis of the timing and amounts: The total premium covers 12 months, so the monthly cost is $2,400 ÷ 12 = $200. At 30 June 2021, one month has expired (June), so $200 of the premium has been consumed, leaving $2,400 − $200 = $2,200 as a prepaid asset (prepaid insurance) on the balance sheet.

Why this aligns with accrual accounting: Expenses are recognized when incurred, not when paid. The portion of the premium that has not yet expired remains as an asset (prepaid insurance) until it is used. The portion that has expired for June is recognized as an expense of $200 in the income statement.

Conclusion about the option's correctness: The calculation correctly reflects one month of insurance consumption ($200) and the remaining prepaid amount ($2,200). The balance sheet would show a prepaid insurance asset of $2,200, and the income statement would show insurance expense of $200 for June.

Note on potential misinterpretations: If someone misallocated the entire $2,400 as an expense upfront, that would ignore the matching principle and the asset relationship. If they assumed a different time period (e.g., recognizing 12 months of expense immediately), the figures would be incorrect. The stated option accurately captures the proper monthly allocation and the resulting asset and expense amounts.

MCD2160 - T2 - 2025 MCD2160 Trimester 2 2025 Mid Test Week 7 in Tutorial 7 Period 2

If a company pays a 12-month insurance premium for $2,400 on 1 June 2021, then at 30 June 2021 the accounts will show:

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