Eve's Apples opened for business on January 1,2018,and paid for two insurance policies effective that date.The liability policy was $36,000 for 18 months,and the crop damage policy was $12,000 for a two-year term.What was the balance in Eve's Prepaid Insurance account as of December 31,2018?
A)$9,000.
B)$18,000.
C)$30,000.

Question

Quizplus · Accepted Answer

The liability policy covers 18 months, which means it is effective until June 30, 2019. Therefore, as of December 31, 2018, half of the policy has been used, which is $18,000/2 = $9,000. The crop damage policy covers a two-year term, which means it is effective until December 31, 2019. Therefore, as of December 31, 2018, one year has passed, which is half of the policy, which is $12,000/2 = $6,000. Total prepaid insurance balance as of December 31, 2018, is $9,000 + $6,000 = $<<9000+6000=15000>>15,000. However, this is not an option, so we need to divide the liability policy equally for the two-year term to get the correct answer: ($36,000/18 months x 12 months) x 1 year = $24,000. Therefore, the prepaid insurance balance as of December 31, 2018, is $9,000 (for the liability policy) + $24,000 (for the crop damage policy) = $<<9000+24000=33000>>33,000. However, this is also not an option. We need to note that the question asks for the balance, not the expense, so the correct answer would be to subtract the insurance expense for the year from the total prepaid insurance: $36,000/18 months x 12 months = $24,000 for the liability policy and $12,000/2 = $6,000 for the crop damage policy. Therefore, the prepaid insurance balance as of December 31, 2018, is $36,000 (liability policy) - $24,000 (insurance expense for the year) + $12,000 (crop damage policy) - $6,000 (insurance expense for the year) = $18,000. Thus the correct answer is B.

Eve's Apples Opened for Business on January 1,2018,and Paid for Two