An entity's financial year ends on 30 June.On 1 May it pays a 12-month insurance premium of $24 000.Under the accrual system of accounting how much of the premium will be recognised as an expense for the current year ended 30 June and how much will be treated as an asset (prepaid insurance)?

Question

Quizplus · Accepted Answer

Since the entity's financial year ends on 30 June, the insurance premium payment made on 1 May will cover the period from 1 May of the current year to 30 April of the following year. Thus, for the current financial year ended 30 June, only a part of the premium paid will be recognised as an expense and the rest will be treated as an asset (prepaid insurance). The portion of the premium that relates to the current financial year is calculated as follows:

Period covered by the premium payment = 1 May to 30 June
Proportion of the premium for the period = (2/12) = 1/6

Therefore, the expense for the current financial year is:

Expense = Total Premium x Proportion for current year
Expense = $24,000 x (1/6)
Expense = $4,000

The remaining portion of the premium ($24,000 - $4,000 = $20,000) will be treated as an asset (prepaid insurance) on the balance sheet as at 30 June.

An Entity's Financial Year Ends on 30 June