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Hi
Could you please help me to explain the follwoing question?
At 1 july 20×4, a company had prepaid insurance of $8200. On 1 January 20×5 the company paid $38000 for insurance for the year to 30 September 20×5.
What figures should appear for insurance in the company’s financial statements for the year ended 30 June 20×5?
SOCI SOFP
a) $27200 Prepayment $190000
b) $39300 Prepayment $9500
c) $36700 Prepayment $9500
d) $55700 Prepayment $9500
d) $55700 Prepayment $9500
Ans: C
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– The reporting period is 1.Jul.x4 to 30.Jun.x5.
– Insurance was covered for one year. The figures should arrive from:
$
Beginning balance 8,200
Addition 38,000
Expense recognised (W) (36,700)
———–
Ending balance 9,500Working:
The beginning balance is to be all recognised fully this year of $8,200. The addition was to cover from 1.Oct.x4 to 30.Sep.x5 which is only 9 months for the reporting period to 30.Jun.x5. Therefore, we get the following figures:Beginning bal. of prepayment recognised as exp. 8,200
Addition of exp. to be recognised (38,000 x 9/12) 28,500
———-
Total insurance exp. to SOCI 36,700Ask yourself “How much of the $38,000 payment relates to next accounting period?” The answer is “That element of the year’s payment of $38,000 relating to July, August and September”
So 3 months of the year’s payment is a prepayment.
The expense this year is last year’s prepayment + 9 / 12 of the $38,000
So 8,200 + 28,500 = 36,700
The answer is therefore “c”
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