Rent-a-Wreck,Inc.paid $36,000 cash for a two-year insurance policy on April 1,2011.What adjustment should the company make before preparing its annual financial statements on December 31,2011?

Question

Quizplus · Accepted Answer

The insurance policy was purchased on April 1, 2011, and is valid for two years. Therefore, the insurance expense for the period from April 1, 2011, to December 31, 2011, is 9/24 of the total cost of the policy, or $13,500. This amount should be recognized as Insurance expense and Prepaid insurance should be decreased by the same amount.

Rent-A-Wreck,Inc