Question

On July 1, 20x8, Hathaway Ltd. purchased a 4 year insurance policy and paid a premium of $37570. Hathaway has a December 31 year end. Which of the following statements is true? of Select one: a. Under cash basis accounting, there will be a balance of $23481 in the Prepaid insurance account on December 31, 20x9 b. Under accrual accounting, there will be a balance of $32874 in the Prepaid insurance account on December 31, 20x8 c. Under cash basis accounting, the insurance expense for the period ending December 20x8 will be $4696 d. Under accrual accounting, there will be a balance of $18785 in the Prepaid insurance account on December 31, 20x9 Check

Answer 1

Answer b Under accrual accounting, there will be a balance $ 32874 in the prepaid insurance account on December 31, 20X8. Total Insurance premuim $ 37,570 Period of policy (4 years ) 48 months No. of months covered in the year 2008 is 6 months $ $ 37,570 (4,696) Total Insurance premuim Less : Current year insurance expensel $37570/48*6) Balance in Prepaid insurance account on 31.12.20x8 under accrual accounting $ 32,874

Note: Under accrual accounting, revenues and expenses are recorded when they are earned or incurred irrespective of receipt or payment of cash. whereas under cash accounting , revenues and expenses recorded when they are actually received or paid.