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Hello,
Could you please explain me the logic behind the solution to this exercise? I have tried to reach the answer by myself drawing a timeline of the months to help me, but I still cannot. It is very confusing for me that in the first part of the question the year ends on 31st March and in the second part ends on 30 June. I don’t understand for what period I need to do the calculation…
Details of a company’s insurance policy are shown below:
Premium for year ended 31 March 20X6 paid April 20X5 $10,800
Premium for year ending 31 March 20X7 paid April 20X6 $12,000What figures should be included in the company’s financial statements for the year ended 30 June 20X6?
Solution: 10800/12 x 9 = 8100
12000/12 x 3 = 3000
prepayment = 9000 (12000/12 x 9)Any help will be greatly appreciated.
It is the payment that is for the periods to 31 March. The company’s year end is 30 June.
So we need the expense for the period from 1 July 20X5 to 30 June 20X6.
From 1 July X5 to 31 March 20X6 is 9 months and therefore the expense for this period is 9/12 x 10,800.
From 1 April 20X6 to 30 June 20X6 is 3 months, and so the expense for this period is 3/12 x 12,000.
Have you watched my free lectures on this? The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well 🙂
Oooh, now I got it, thank you so much! Of course I watch them, and they are amazing, thank you for creating them and answering to me here! 🙂
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