Question

Styles Companies LA DIVA has three stores, paid insurance policies for all its stores. The first policy was paid on July 1, 20x0 for 24 months. The second policy was paid on September 30, 20X0 for 18 months and the third policy was paid on November 1, 20x0 for 15 months. The company closes the books of its stores on June 30. The policy payments were $ 48,000, $ 54,000 and $ 22,500, respectively. Determine the balance of Insurance Paid in Advance and the Insurance Expense for June 30, 20x1.

Answer 1

Interest Expense will be for the period ending June 30, 20X1 and the rest will go to the Insurance Paid in Advance.

1st policy payment period starting from 1 July, 20X0 for 24 months

Insurance policy payment = $48,000

Insurance policy expense period till June 30, 20X1 = 12 months

Insurance expense = Insurance amount paid * Expense period / Policy period = $48,000 * 12 / 24 = $24,000

Insurance paid in advance = $48,000 - $24,000 = $24,000.

2nd policy payment period starting from September 30, 20X0 for 18 months

Insurance policy payment = $54,000

Insurance policy expense period till June 30, 20X1 = 9 months

Insurance expense = Insurance amount paid * Expense period / Policy period = $54,000 * 9 / 18 = $27,000

Insurance paid in advance = $54,000 - $27,000 = $27,000.

3rd policy payment period starting from 1 November, 20X0 for 15 months

Insurance policy payment = $22,500

Insurance policy expense period till June 30, 20X1 = 8 months

Insurance expense = Insurance amount paid * Expense period / Policy period = $22,500 * 8 / 15 = $12,000

Insurance paid in advance = $22,500 - $12,000 = $10,500.

Total Insurance expense for June 30, 20X1 = $24,000 + $27,000 + $12,000 = $63,000.

Total Insurance paid in Advance for June 30, 20X1 = $24,000 + $27,000 + $10,500 = $61,500.