ABC Company paid $6,000 cash for insurance in June that provides coverage for six months,from July through December.How much expense should be recognized in June to be in accordance with generally accepted accounting principles?
A) No expense should be recognized in June.
B) $6,000
C) $1,000 ($6,000 x 1/6 for the month of June)
D) $3,000

Question

Quizplus · Accepted Answer

According to generally accepted accounting principles (GAAP), expenses should be recognized in the period in which they are incurred. Since the insurance coverage starts in July, no expense should be recognized in June. The $6,000 is a prepaid expense and will be recognized as an expense over the coverage period from July to December.

ABC Company Paid $6,000 Cash for Insurance in June That