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Zara pays her annual insurance in advance on 1 January each year. On 1 January 20X6 she paid $450 and on 1 January 20X7 she paid $510. What should the insurance charge be in the statement of profit or loss for the year ended 30 November 20X7?
A. $450
B. $510
C. $505
D.$547.50The correct answer is C
I have opted for the option B which is the wrong answer as she pays in advance her insurance.
I would be grateful if you, sir, can help me to figure out how to obtain the correct answer.
We need the expense for the period 1 December 20X6 to 30 November 20X7.
For 1 December X6 to 31 December X6 is 1 month and so the expense is 1/12 x 450 = 37.50.
For 1 January X7 to 30 November X7 is 11 months, and so the expense is 11/12 x 510 = 467.50
So the total expense = 37.50 + 467.50 = 505
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