A business pays Rs. 120,000 for twelve months of insurance on 1 October. What insurance expense and prepaid insurance are reported on 31 December?
Correct answer: B. Expense Rs. 30,000 and prepaid Rs. 90,000
- A. Expense Rs. 20,000 and prepaid Rs. 100,000
- B. Expense Rs. 30,000 and prepaid Rs. 90,000
- C. Expense Rs. 90,000 and prepaid Rs. 30,000
- D. Expense Rs. 120,000 and prepaid nil
Explanation
Three months have expired by 31 December, so the expense is Rs. 120,000 multiplied by 3/12, or Rs. 30,000. The remaining nine months, amounting to Rs. 90,000, are reported as a prepaid asset.
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Financial statements present a business's financial performance and position through the income statement, statement of financial position, cash flow statement and changes in equity. Questions involve preparing and interpreting these statements, adjusting entries, depreciation, closing inventory, accrued and prepaid items, and distinguishing profit from cash flow.
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