[ab29]

I am having trouble comprehending the adding of the 17,500 increase in Prepaid Insurance. I thought that if it was an increase in asset you would deduct it from the 437,000. Can someone dumb down the steps please.

Under East Co.’s accounting system, all insurance premiums paid are debited to prepaid insurance. For interim financial reports, East makes monthly estimated charges to insurance expense with credits to prepaid insurance. Additional information for the year ended December 31, Year 2, is as follows:

Prepaid insurance at December 31, Year 1 $105,000

Charges to insurance expense during Year 2

(including a year-end adjustment of $17,500) 437,500

Prepaid insurance at December 31, Year 2 122,500

What was the total amount of insurance premiums paid by East during Year 2?

B. $455,000

[tygolfer]

Post these questions in the FAR study group, you will likely get a quicker response

[kdawg22]

i found that using t-account will studying for FAR seemed to help a lot

———
105 |
x | 437.5
———
122.5

Solving for x will give you the 455. The year-end adjustment of 17.5 is included in part of the charges which is why it shows up on the credit side of the t-account

[kdawg22]

for some reason when i preview the t-account it looks fine but then when i go to post the reply it gets messed up. the 105 & x are on the debit (left side) & the 437.5 is on the credit (right side)

[Missy]

It's asking what was paid (how much cash was disbursed) during the year. If 437,500 was expense AND prepaid insurance increased by 17,500 that means 455,000 was paid in total.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Author]

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