Question

On June 1, 2019, a firm purchased a 1-year insurance policy for $5,700 and paid the full premium in advance. The insurance expense associated with this policy for the year ending December 31, 2019, is Multiple Choice $3,325. $1,900. $5,700. $3,800.

Answer 1

Solution:

As per the information given in the question we have

The firm purchased a one year insurance policy on June 1, 2019 for $ 5,700

The period of the policy is June 01, 2019 to May 31, 2020.

We know that the Financial year 2019 ends on 31^st December, 2019. The insurance expense associated with this policy, with respect to the Year 2019, shall be allocated to the period from June 1, 2019 to Dec 31, 2019.

Thus the Insurance expense for a period of 7 months (June 1, 2019 to Dec 31, 2019) shall be recorded in the Year 2019.

The Insurance expense for a balance period of 5 months (January 1, 2020 to May 31, 2020)shall be recorded in the Year 2020.

Therefore the Insurance expense for the Year 2019 is

= Insurance expense * ( 7 / 12 )

= $ 5,700 * ( 7/ 12)

= $ 3,325

The insurance expense associated with this policy with respect to the Year 2019 is = $ 3,325

The solution is Option 1= $ 3,325