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3 September, 13:17

Roro, Inc. paid $7,200 to renew its only insurance policy for three years on March 1, Year 5, the effective date of the policy. At March 31, Year 5, Roro's unadjusted trial balance showed a balance of $300 for prepaid insurance and $7,200 for insurance expense. What amounts should be reported for prepaid insurance and insurance expense in Roro's financial statements for the three months ended March 31, Year 5?

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  1. 3 September, 16:37
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    Insurance expense amount is $500

    Prepaid insurance amount is $7,000

    Explanation:

    The prepaid insurance amounts to $300, on March 31, before the adjustment, that represents the remaining portion of the policy before the renewal. And this amount must have expired by the March 31, as there is only a single insurance policy and which will be renewed on March 1.

    The $300 is involves in the insurance expense for the 3 months that ended on March 31, and in addition, 1 month coverage is there.

    Therefore, amount of $200 ($7,200 / 36 months), which is involves in the insurance expense for the 3 months. In aggregate $500 of the insurance expense is acknowledged.

    Prepaid insurance left out balance on March 31, is $7,000 ($7,200 - $200).
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