Eve's Apples opened business on January 1, 2009, and paid for two insurance policies effective that date. The liability policy was $36,000 for eighteen-months, and the crop damage policy was $12,000 for a two-year term. What was the balance in Eve's prepaid insurance as of December 31, 2009?

Question

Quizplus · Accepted Answer

The liability policy is for eighteen months, which means it will expire on June 30, 2010 (18 months after January 1, 2009). So, as of December 31, 2009, this policy has been in effect for only 12 months.
The crop damage policy is for two years, which means it will expire on December 31, 2010. So, as of December 31, 2009, this policy has been in effect for only one year.
To calculate the balance in prepaid insurance as of December 31, 2009, we need to determine how much of each policy has been used up and subtract that amount from the total amount paid.
For the liability policy: 
Amount paid = $36,000
Time covered = 18 months
Time expired as of December 31, 2009 = 12 months
Proportion of policy used up = 12/18 = 2/3
Amount used up = 2/3 x $36,000 = $24,000
Balance in prepaid insurance for the liability policy = $36,000 - $24,000 = $12,000
For the crop damage policy:
Amount paid = $12,000
Time covered = 2 years = 24 months
Time expired as of December 31, 2009 = 12 months
Proportion of policy used up = 12/24 = 1/2
Amount used up = 1/2 x $12,000 = $6,000
Balance in prepaid insurance for the crop damage policy = $12,000 - $6,000 = $6,000
Total balance in prepaid insurance as of December 31, 2009 = $12,000 + $6,000 = $18,000

Eve's Apples Opened Business on January 1, 2009, and Paid