A company paid the $1,350 premium on a three-year insurance policy on April 1,2015.The policy gave protection beginning on that date.How many dollars of the premium will appear as an expense on the calendar year 2015 income statement assuming the accrual basis of accounting? Assuming the cash basis of accounting?
A) $1,350 accrual basis; $337.50 cash basis.
B) $450 accrual basis; $450 cash basis.
C) $337.50 accrual basis; $1,350 cash basis.
D) $1,012.50 accrual basis; $1,350 cash basis.
E) $1,350 accrual basis; $1,350 cash basis.

Question

Quizplus · Accepted Answer

Under the accrual basis, the expense is recognized over the period it covers. For 2015, 9 months of the policy are used, so $1,350/36 months * 9 months = $337.50. Under the cash basis, the entire payment is recognized when paid, so $1,350.

A Company Paid the $1,350 Premium on a Three-Year Insurance