Fair Play,Inc.paid $3,600 on September 1,2011 for an 18-month insurance policy beginning on that day.The company recorded the entire amount as prepaid insurance.How much insurance expense should the company show on its income statement for the year ended December 31,2011?

Question

Quizplus · Accepted Answer

The insurance policy is for 18 months, or 1.5 years. Therefore, the annual expense is $3,600/1.5 = $2,400.
For the year ended December 31, 2011, the company used 4 months of the insurance policy (September, October, November, December), or 4/12 = 1/3 of the year.
Therefore, the insurance expense for the year ended December 31, 2011 is 1/3 * $2,400 = $800. 
The prepaid insurance account would have a remaining balance of $3,600 - $800 = $2,800 at the end of the year.