On June 30,a company paid a premium of $2,400 for one year of insurance coverage,which started on July 1.The company has a calendar year-end.Which of the following statements about this situation is correct?
A)On June 30,Cash would be debited for $2,400.
B)Insurance Expense of $1,200 will be reported on the income statement for the year ending December 31.
C)Prepaid Insurance of $200 will be reported on the balance sheet at December 31.
D)Prepaid Insurance of $2,400 will be reported on the balance sheet at December 31.

Question

Quizplus · Accepted Answer

When a company pays for something that provides benefits in future periods,the cost is reported as an asset.This prepayment would be recorded as an asset called Prepaid Insurance.Insurance Expense in the amount of $200 per month (or $2,400 ÷ 12)will be recorded as the premiums are used.Insurance Expense of $1,200 (or $200 × 6 months)will be reported on the income statement for the year ending December 31.Prepaid Insurance of $1,200 (or the prepayment of $2,400 - the amount used of $1,200)will be reported on the balance sheet.

On June 30,a Company Paid a Premium of $2,400 for One