[austinc]

Say an entity has an annual premium for $12,000 starting July 1 but only has to pay quarterly payments: the 1st one for $6,000 & the rest for $2,000. Year end is Dec 31. If an entity doesn’t pay the full premium at once & instead makes the quarterly payments, should the entity still recognize the expenses by amortizing the annual premium over 6 mo? Or should the expenses be amortized based on the actual payment for their respective quarter?

[livealittle]

if the company pays the $6000 in July, then that should go on the balance sheet as $5000 in an asset account called Prepaids and expense of $1000 for insurance expense for July. In August expense $1000 by debiting insurance expense and crediting the asset account prepaids.

keep going through out the year. if Cash is spent for a service not yet provided, the balance of the cash spent is an asset of prepaids.

hope this helps

BEC - 8/8/16
REG - 66, 77
AUD - 81
FAR - 9/8/16

[ECHendrickson]

The differences in approach in the real world would likely be too immaterial for most companies to care, but from an academic perspective it would likely be that the benefit of insurance is perceived as evenly spread throughout the year. So to answer your question, yes, I think that the amortization should be based on the premium over 6 months as opposed to actual payment over that quarter (e.g. 1k per month amortized instead of 2k based on the $6k payment).

[Author]

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