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Dear John,
This question is from BBP’s Practice and Revision Kit:
At July 2004 a company had prepaid insurance of 8200.
On January 2005 the company paid 38000 for insurance for the year to 30 September 2005.
What figures should appear for insurance in the company’s financial statements for the year ended 30 June 2005?Could you please explain how to solve this as per no explanation in the solution.
Thank you!
During the year to 30 June X5 they had paid cash of 38,000.
However this was for the period 1 October 20X4 to 30 September 20X5.The expense relating to the current accounting period is 1 October X4 to 30 June X5 – 9 months – so 9/12 x 38,000 = 28,500. In addition there was 8,200 prepaid at the start of the accounting period, so a total expense of 36,700.
As at 30 June 20X5 they had prepaid the period 1 July 20X5 to 30 September 20X5 – 3 months – so 3/12 x 38,000 = 9,500 is the prepayment which appears as an asset on the SOFP.
Have you watched my free lectures? They are a complete course for Paper F3 and cover everything needed to be able to pass the exam well.
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