Sugar City uses the purchases method to record all prepayments.The City has a 6/30 fiscal year-end.On December 31, 2000, the city purchased a three-year insurance policy covering all city owned vehicles acquired by the General Fund to be used in general government activity.Cost of the policy was $360,000.After the 6/30/01 closing entries, the appropriate balance sheet accounts and balances associated with this transaction are:

Question

Quizplus · Accepted Answer

Under the purchases method, the entire cost of the insurance policy is recorded as an expenditure when purchased. Therefore, the Expenditure account would show $360,000, and there would be no balance in the Prepaid Insurance account after the closing entries.

Sugar City Uses the Purchases Method to Record All Prepayments