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I came across this question on the Becker FAR MCQs for FAR2 and I’m a little confused by the explanation. I’m hoping that someone can explain this to me so I can understand it a little more clearly 🙂
Roro, Inc paid $7200 to renew its only insurance policy for three years on March 1, Year 5, the effective date of the policy. At March 31, Yeah 5, Roro’s unadjusted trial balance showed a balance of $300 for prepaid insurance and $7,200 for insurance expense. What amounts should be reported for prepaid insurance and insurance expense in Roro’s financial statements for the three months ended March 31, Year 5?
Answer: Prepaid Insurance- $7000, Insurance Expense- $500
The prepaid insurance reflected in the unadjusted trial balance would be fully expensed and one month of the renewed policy would be expensed. Insurance Expense equals $500 ($300 plus $7200/36 months). Prepaid insurance equals $7000 (7200X35/36).
AUD: PASSED ; Expired, retaking August 23rd
BEC: PASSED ; Expired, retaking July 11th
REG: PASSED 
FAR: FAILED ; Retaking May 23rd