Hour Place Clock Repair paid $2,580 cash in advance for a one year insurance policy. According to the matching principle, if 3 months of the policy has expired by the end of the current fiscal year, how much should Hour Place Clock Repair report as Insurance Expense on the Income Statement?

Question

Quizplus · Accepted Answer

If three months of the policy has expired, then nine months are left to be covered under the policy.

The amount of insurance expense that should be reported on the income statement for the current fiscal year is equal to the portion of insurance cost that has been used up or expired during the year.

Therefore, the insurance expense for the current fiscal year should be:

Insurance expense = Total insurance cost * (months expired / total months covered)

Insurance expense = $2,580 * (3/12)
Insurance expense = $645

Therefore, the correct answer is D) $645.

Hour Place Clock Repair Paid $2,580 Cash in Advance for a One