Mary Chain Investments purchased an 18-month insurance policy on May 31, 2015 for $3,600. The December 31, 2015 balance sheet would report Prepaid Insurance of

Question

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The policy was purchased on May 31, 2015, meaning that by December 31, 2015, 7 months out of the original 18-month policy would have passed. Therefore, 7/18 of the prepaid insurance has been used, leaving 11/18 left. $3,600 * (11/18) = $2,200, which would be reported as Prepaid Insurance on the December 31, 2015 balance sheet. Choice A is incorrect because Prepaid Insurance is reported on the Balance Sheet, not the Income Statement. Choice B is incorrect because $1,400 would represent only 5 months' worth of the policy and does not take into account the fact that 7 months have already passed. Choice D is incorrect because the entire $3,600 policy cost cannot be classified as prepaid at the end of the 7-month period.

Mary Chain Investments Purchased an 18-Month Insurance Policy on May