Question

Aurora Corporation operated without insurance coverage for the first month of operations. Then, on February 1, the company paid the $4,800 premium on a two-year insurance policy with benefits beginning on that date. The company uses the accrual basis. How much insurance expense will be reported on the company's income statement for their first year ended December 31?

Answer 1

Answer:

$4,400 insurance expense will be reported on the company's income statement for their first year ended December 31.

Explanation:

When the company pays for the premium on a two-year insurance policy on February 1, the following must happen.

1. Recognize the Asset : Prepaid Insurance

2. De-recognize a decrease in Assets of Cash

At the end of the First year, the company will have utilized 11 months of the insurance policy, the following must happen

1. Recognize an Expense : Insurance Expense to the extent the insurance was utilized.

2. De-recognize the Asset : Prepaid Insurance to show utilization of the Asset benefit.

Entry is as follows :

Insurance Expense $4,400 (debit)

Prepaid Insurance $4,400 (credit)

Insurance Expense Calculation = $4,800 × 11/ 12 = $4,400.