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23 September, 12:59

A company purchased a two-year fire insurance policy on May 1, 2012. It paid the $2,400 premium in cash on the same date and recorded the entry with a debit to Prepaid Insurance for $2,400. The company has adopted a 12-month accounting period ending on January 31 of each year. If the company uses the accrual basis of accounting, how much insurance expense will be recorded for the periods ended January 31, 2013, and January 31, 2014, respectively

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  1. 23 September, 15:28
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    The insurance expense to be recorded for period ended 31 January 2013 is $900

    The insurance expense to be recorded for period ended 31 January 2014 is $1200

    Explanation:

    From the date of insurance premium payment till 31 January 2013 gives a period of nine months, which means that nine months of insurance premium should be recognized as expense in that period.

    January 31 2013 insurance expense=$2400*9/12

    =$900

    From February 1 2013 till January 31 2014, gives a complete year, which means 12-month insurance premium should be recognized in that period, hence the below calculation:

    January 31 2014 insurance expense=$2400*12/24

    =$1200
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