A company paid the $1,350 premium on a three-year insurance policy on April 1, 2020. The policy gave protection beginning on that date. How many dollars of the premium will appear as an expense on the calendar year 2020 income statement assuming the accrual basis of accounting? Assuming the cash basis of accounting?

Question

Quizplus · Accepted Answer

Under the accrual basis of accounting, expenses are recognized when they are incurred, not necessarily when they are paid. The $1,350 premium covers three years, so for one year (2020), the expense is $1,350 divided by 3, which equals $450. However, the correct choice mentions $337.50 for the accrual basis, which appears to be an error in the question's choices as none match the correct calculation. For the cash basis of accounting, the entire payment is recognized as an expense in the year it is paid, so $1,350 for 2020.

A Company Paid the $1,350 Premium on a Three-Year Insurance