Hour Place Clock Repair paid $2,400 cash in advance for a one year insurance policy. According to the matching principle, if 5 months of the policy has expired by the balance sheet date, how much should Hour Place Clock Repair report as Prepaid Insurance?

Question

Quizplus · Accepted Answer

If 5 months of the policy has expired out of the 12 months paid in advance, then 5/12th of the policy has been used up.

The amount of Prepaid Insurance that should be reported on the balance sheet will be the portion of the insurance policy that has not yet been used up, which is 7/12th of the policy.

Therefore, Prepaid Insurance = (7/12) x $2,400 = $1,400

Hence, the correct answer is option D) $1,400.

Hour Place Clock Repair Paid $2,400 Cash in Advance for a One