Question

20. An analysis of Y Corp’s prepaid expense account at December 31, year 2 revealed the following:

• An opening balance of $1,500 for Y comprehensive insurance policy. Y had paid an annual premium of $3,000 on July 1, year 1.
• A $3,200 annual insurance premium payment made July 1, year 2.
• A $2,000 advance rental payment for a warehouse Y leased for one year beginning January 1, year 3.

In its December 31, year 2 balance sheet, what amount should Y report as prepaid expenses?

Answer 1

Calculation of the amount of prepaid expense on December 31, Year 2:

The prepaid expense as on December 31, year 2 = Advance rental payment + Insurance premium for 6 months.

= $2,000 + [($3,200/12)*6]

=$3,600

Notes:

1. Annual premium of $3,200 was paid on July 1, year 2. Here, half of the premium is for year 2 (July 1 to December 31) and the other half is for year 3 (January 1 to June 30). So, $1,600 will be considered as Prepaid expense.

2. There is an opening balance of $1,500 in year 2. This is the prepaid expense considered on December 31, year 1 for the annual premium paid on July 1, year 1. The same will not be considered as a prepaid expense for December 31, year 2 balance sheet.