During its first financial year, ended 31 December 20X2, an entity paid £3,000 in respect of insurance premiums. All premiums were paid in advance and, except for the following, related to policies with renewal dates coinciding with the firm's accounting year end date.
Policy A Policy B
Annual premium £240 £1,200
Renewal date 30 June 20X3 30 April 20X3
Premium paid 1 July 20X2 1 May 20X2
The firm's insurance expense for 20X2 was:

Question

Quizplus · Accepted Answer

For Policy A (£240 annual premium), 6 months (July to December) relate to 20X2, so £120 is expensed in 20X2. For Policy B (£1,200 annual premium), 8 months (May to December) relate to 20X2, so £800 is expensed in 20X2. The remaining £2,000 of premiums relate to policies with renewal dates coinciding with the year-end, so they are fully expensed in 20X2. Total insurance expense for 20X2 is £120 (Policy A) + £800 (Policy B) + £2,000 (other policies) = £2,920. However, the correct calculation should be considering the total paid (£3,000) minus the prepayments for the next year (£240 for Policy A for 6 months not in 20X2 and £400 for Policy B for 4 months not in 20X2), which equals £3,000 - (£120 + £400) = £2,480.

During Its First Financial Year, Ended 31 December 20X2, an Entity