Hour Place Clock Repair paid $1,800 cash in advance for a one year insurance policy.According to the matching principle,if 4 months of the policy has expired by the end of the current fiscal year,how much should Hour Place Clock Repair report as Insurance Expense on the Income Statement?
A) $0
B) $600
C) $1,200
D) $1,800

Question

Quizplus · Accepted Answer

The matching principle requires that expenses be matched with the revenues they generate. In this case, the insurance policy is a prepaid expense that needs to be allocated to the periods that it benefits the company. Since 4 out of 12 months have passed, the portion of the insurance policy that should be recognized as an expense would be:

($1,800/12) x 4 = $600

Therefore, Hour Place Clock Repair should report $600 as Insurance Expense on the Income Statement.

Hour Place Clock Repair Paid $1,800 Cash in Advance for a One