Sugar City uses the purchases method to record all prepayments.The city has a 6/30 fiscal year-end.On 12/31/14, the city purchased a three-year insurance policy covering all city owned vehicles acquired by the general fund to be used in general government activities.Cost of the policy was $360,000.After the 6/30/15 closing entries, the appropriate balance sheet accounts and balances in the city's general fund associated with this transaction are
A)Prepaid insurance $300,000; Expenditures $60,000.
B)Prepaid insurance $300,000; Expenditures $360,000
C)Prepaid insurance $0; Expenditures $360,000.
D)Prepaid insurance $0; Expenditures $60,000.

Question

Quizplus · Accepted Answer

Since Sugar City uses the purchases method, the whole expense of the insurance is recorded when it is purchased, therefore, the amount of $360,000 is recorded as an expenditure in the city's general fund. As of 6/30/15, six months have passed since the purchase of the insurance policy, and therefore, half of the cost ($180,000) has been used and should be expensed. The remaining unexpired cost of the insurance policy ($360,000 - $180,000 = $180,000) should be recorded as a prepaid insurance, and therefore the appropriate balance sheet accounts and balances in the city's general fund associated with this transaction as of 6/30/15 are: Prepaid insurance $0; Expenditures $360,000.

Sugar City Uses the Purchases Method to Record All Prepayments