Homework Answers
Answer:
The annual insurance policy paid in advance will be treated on accrual basis as follows:
(i) The initial payment will be recorded as an increase to a Prepaid Insurance account.
(ii) Over time, the expired portion of the policy must be removed from the asset account as it has been used up and is no longer considered an asset.
(iii) As a portion of the policy expires, the expired portion will be removed and transferred to an expense account.
Explanation to point (iv): Treating the prepayment of the policy as an expense and the expired portion as an asset is wrong according to the accrual basis of accounting.
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