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Eve's Apples opened for business on January 1, 2021, and paid for two insurance policies effective that date. The liability policy was $48,600 for 18 months, and the crop damage policy was $33,600 for a two-year term. What was the balance in Eve's Prepaid Insurance account as of December 31, 2021?

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Answer:

Total Prepaid balance as at December 31=$16,800+$16,200=$33,000

Explanation:

Liability policy

Since the liability policy is for 18 months and all the payments regarding 18 months has been paid but the expense shall only be recognised for 12 months period i.e. from January 1, 2021 to December 31, 2021 and accordingly the prepaid insurance balance in respect of liability policy as at December 31, 2021 will be as follows:

Prepaid insurance in respect of Liability policy= $48,600-$48,600*12/18

                                                                             =$16,200

Corp damage policy

Since the corp damage policy is for 2 years and all the payments regarding 2 years has been paid but the expense shall only be recognised for 12 months period i.e. from January 1, 2021 to December 31, 2021 and accordingly the prepaid insurance balance in respect of corp damage policy as at December 31, 2021 will be as follows:

Prepaid insurance in respect of corp policy= $33,600-$33,600*12/24

                                                                             =$16,800

Total Prepaid balance as at December 31=$16,800+$16,200=$33,000

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