Rent a Wreck,Inc.began operations on July 1,2012.On July 1,the company paid $9,600 cash in advance for a one-year insurance policy beginning on that day.How much insurance expense will appear on the company's income statement for the year ended December 31,2012?

Question

Quizplus · Accepted Answer

The insurance policy covers a period of one year, starting from July 1, 2012, and ending on June 30, 2013. Therefore, on December 31, 2012, six months of the policy period (July 1, 2012, to December 31, 2012) have already elapsed.

To calculate the insurance expense that will appear on the income statement for the year ended December 31, 2012, we need to use the accrual basis of accounting. According to this method, expenses are recognized when they are incurred, not when they are paid.

Since the company paid $9,600 in advance for a one-year insurance policy, the entire amount of $9,600 cannot be recognized as an expense in the year ended December 31, 2012.

Instead, we need to recognize only the portion of the insurance expense that relates to the six months that have already elapsed.

To do this, we can divide the total premium of $9,600 by 12 months to get the monthly premium of $800. Then, we can multiply the monthly premium by the number of months that have elapsed (6) to get the insurance expense for the period of July 1, 2012, to December 31, 2012, which is $4,800.

Therefore, the correct answer is C) $4,800.