On May 1, a two-year insurance policy was purchased for $18,000 with coverage to begin immediately. What is the amount of insurance expense that would appear on the company's income statement for the first year ended December 31?
A) $5,270.
B) $6,750.
C) $750.
D) $6,000.
E) $18,000.

Question

Quizplus · Accepted Answer

The policy covers two years and was purchased on May 1, so it will be in effect for 20 months (May 1 to December 31 of the next year).

To find the amount of insurance expense for the first year, we need to divide the total cost by the number of months in the policy and then multiply by the number of months that fall within the first year.

($18,000 / 20 months) x 8 months = $7,200

However, the question asks for the amount that would appear on the income statement, which will only show the insurance expense for the current year. Since the policy was purchased on May 1, the first year of coverage will only include the months of May through December.

($18,000 / 20 months) x 8 months x 8/12 = $6,000

Therefore, the amount of insurance expense that would appear on the company's income statement for the first year ended December 31 is $6,000.

On May 1, a Two-Year Insurance Policy Was Purchased for $18,000