Exercise 3-7 Determining assets and expenses for accrual and cash accounting L.O
ID: 2389028 • Letter: E
Question
Exercise 3-7 Determining assets and expenses for accrual and cash accounting L.O. C2On September 1, 2007, a company paid a $23,400 premium on a 36-month insurance policy for coverage beginning on that date. Refer to that policy and fill in the blanks in the following table. (Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)
Balance Sheet Prepaid Insurance Asset Using Insurance Expense Using
Accrual Basis Cash Basis Accrual Basis Cash Basis
Dec. 31, 2007 $ $ 2006 $ $
Dec. 31, 2008 2007
Dec. 31, 2009 2008
Dec. 31, 2010 2009
Total $
$
please explain how you would compute the above figures
Explanation / Answer
The table isn't real clear, but under accrual accounting you would set up a prepaid insurance account for 23,400 and amortize 23,400/36= 650 per month So at 12/31/2007 you would have expensed 4*650= 2,600 and have 20,800 left as the prepaid asset. At 12/31/2008 you would expense an additional 12*650= 7,800 and have 13,000 left At 12/31/2009 you would expense an additional 12*650=7,800 and have 5,200 left At 12/31/2010 you would expense the remaining 5,200 (8 months worth) Under cash accounting you would expense the entire 23,400 in 2007 when you paid for it.
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