Asked by Kaylie Katsiris on May 07, 2024
Verified
On May 1,a two-year insurance policy was purchased for $18,000 with coverage to begin immediately.What is the amount of insurance expense that would appear on the company's income statement for the first year ended December 31?
A) $750.
B) $5,270.
C) $6,000.
D) $6,750.
E) $18,000.
Insurance Policy
A contract between an insurer and a policyholder that specifies the terms for the payment of claims in the event of a covered loss.
Insurance Expense
The cost allocated to a period for holding insurance policies, protecting against various risks.
Income Statement
A financial statement that shows a company's revenues and expenses over a specific period of time, resulting in a net income or loss.
- Become familiar with and identify the differences between prepaid expenses, accrued expenses, and unearned revenues.
- Learn and employ the depreciation concept, evaluating its consequences on financial documentation.
Verified Answer
ZW
Zachary WrightMay 10, 2024
Final Answer :
C
Explanation :
The total cost of the insurance policy is $18,000 for two years. To find the annual expense, divide the total cost by 2 (years), which equals $9,000 per year. However, since the policy was purchased on May 1 and the first year ends on December 31, only 8 months of insurance expense should be accounted for in the first year. Therefore, the expense for the first year is 8/12 of the annual expense: $9,000 * (8/12) = $6,000.
Learning Objectives
- Become familiar with and identify the differences between prepaid expenses, accrued expenses, and unearned revenues.
- Learn and employ the depreciation concept, evaluating its consequences on financial documentation.