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:

Question

BlackTom AI · Accepted Answer

To tackle this, start by identifying how a prepaid insurance premium is treated in the books. A 12-month premium paid upfront is recorded as an asset (prepaid insurance) and expensed over the months it covers.
Option a: 'A $2,400 expense in the profit and loss statement' would recognize the entire annual premium as an expense immediately, which is incorrect because the benefit spans 12 months, not just June.
Option b: 'A prepayment of $2,200 in the balance sheet and an insurance expense of $200 in the profit and loss account' reflects the correct allocation for one month of coverage (June). The total annual premium is 2400, so monthly expense is 2400/12 = 200. After one month, the unexpired portion is 2400 - 200 = 2200, which remains as a prepaid asset.
Option c: 'A prepayment of $200 in the balance sheet and an insurance expense of $2,000 in the profit and loss account' would imply most of the cost is expensed in June, which contradicts the 12-month period covered by the policy and understates the asset.
Option d: 'None of the other options' would only be true if all other statements were wrong; since option b is correct, this one is false.
Option e: 'A $2,400 asset in the balance sheet' ignores the fact that part of the premium has been consumed by the end of June, so not the full 2400 remains as an asset.
In summary, the proper treatment at 30 June 2021 is to recognize 200 as an insurance expense for June and retain 2200 as a prepaid asset on the balance sheet, matching the one-month period of benefit against the cost incurred.

MCD2160 - T3 - 2025 MCD2160: Mid Test Practice Quiz

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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