Prepaid insurance had a balance of $1,000 on the company's December 31,2011 balance sheet.On June 1,2012,the company paid an additional insurance premium of $3,000.Prepaid insurance had a balance of $1,250 on the company's December 31,2012 balance sheet.How much insurance expense will be reported on the company's income statement for the year ended December 31,2012?

Question

Quizplus · Accepted Answer

To calculate the insurance expense for the year ended December 31, 2012, we need to determine how much of the prepaid insurance balance from December 31, 2011 was used up during the year and how much of the June 1, 2012 payment applies to the year.

First, we need to determine how much insurance was prepaid as of June 1, 2012:

Prepaid insurance on Dec 31, 2011 = $1,000
Insurance paid on June 1, 2012 = $3,000
Total prepaid insurance as of June 1, 2012 = $4,000 ($1,000 + $3,000)

Next, we need to determine how much of the prepaid insurance was used up during the year ended December 31, 2012:

Prepaid insurance as of June 1, 2012 = $4,000
Prepaid insurance as of Dec 31, 2012 = $1,250
Prepaid insurance used during the year = $2,750 ($4,000 - $1,250)

Finally, we can calculate the insurance expense for the year ended December 31, 2012:

Insurance expense = Prepaid insurance used during the year + Insurance paid during the year
Insurance expense = $2,750 + $3,000
Insurance expense = $5,750

However, we are only interested in the insurance expense for the year ended December 31, 2012. Therefore, the insurance expense for the June 1, 2012 payment ($3,000) needs to be allocated over the 7 months from June 1 to December 31:

Insurance expense for June 1 to Dec 31, 2012 = ($3,000 / 12 months) x 7 months = $1,750

So the total insurance expense for the year ended December 31, 2012 is:

Insurance expense = Prepaid insurance used during the year + Insurance paid during the year (allocated to the year)
Insurance expense = $2,750 + $1,750
Insurance expense = $4,500

Therefore, the best choice is D: $2,750.

Prepaid Insurance Had a Balance of $1,000 on the Company's