On 1 May 2018, A Ltd pays $9 600 for a one-year fire insurance policy that expires on 30 April 2019. After the adjusting entry, what would be the balance of prepaid insurance in the balance sheet at 30 June 2018?

Question

Quizplus · Accepted Answer

The one-year insurance policy covers the period from 1 May 2018 to 30 April 2019, which means that A Ltd has prepaid the insurance for the whole year. 
As of 30 June 2018, only two months (May and June) have passed since the purchase of the insurance policy. Thus, the prepaid insurance balance as of 30 June 2018 would be:
Prepaid insurance balance = Total insurance premium - Insurance expense for two months
Prepaid insurance balance = $9,600 - ($9,600/12 * 2) = $8,000
Therefore, the correct answer is B) $8,000.

On 1 May 2018, a Ltd Pays $9 600 for a One-Year