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 31,2012?

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Quizplus · Accepted Answer

The insurance policy covers 18 months, so the monthly insurance expense would be $3,600 / 18 = $200. From September 1, 2011 to December 31, 2012 (16 months), the company would have used up 16/18 of the policy or 8/9 of the prepaid insurance. Thus, the insurance expense for the year ended December 31, 2012 would be (8/9) x $3,600 = $2,400.