The following balances have been excerpted from Edwards' balance sheets:

Edwards Company paid or collected during 2011 the following items:

The insurance expense on the income statement for 2011 was
A) $28,000.
B) $40,000.
C) $43,000.
D) $55,000.

Question

The following balances have been excerpted from Edwards' balance sheets:

Edwards Company paid or collected during 2011 the following items:

The insurance expense on the income statement for 2011 was
A) $28,000. 
B) $40,000. 
C) $43,000. 
D) $55,000.

Quizplus · Accepted Answer

To calculate the insurance expense, we need to look at the change in the prepaid insurance account from the beginning to the end of the year. The beginning balance was $15,000 and the ending balance was $4,000, so the amount of prepaid insurance used during the year was $11,000 ($15,000 - $4,000). We also know that the company paid $54,000 for insurance during the year. Therefore, the total insurance expense for the year was $54,000 + $11,000 = $65,000. However, the question asks for the amount of insurance expense on the income statement, which is the amount that was actually incurred during the year. Since the beginning balance of prepaid insurance was $15,000, $15,000 of the insurance expense was for coverage in the previous year, and only $50,000 ($65,000 - $15,000) relates to coverage in 2011. Therefore, the answer is C) $43,000 ($50,000 - $7,000 adjustment at year-end).

The Following Balances Have Been Excerpted from Edwards' Balance Sheets