The following information relates to the insurance account of Greta's business. The financial year ends on 31 December. Date Details $ 1 January 2024 Prepai...

(a) Insurance prepaid at 31 December 2024

From the 1 April payment ($8 400 for 12 months to 31 March 2025):

The period January to March 2025 (3 months) is prepaid.

Prepaid = $8 400 x 3/12 = $2 100 [1]

From the 1 October payment ($3 600 for 6 months to 31 March 2025):

The period January to March 2025 (3 months out of 6) is prepaid.

Prepaid = $3 600 x 3/6 = $1 800 [1]

Total insurance prepaid = $2 100 + $1 800 = $3 900 [1][1]

(b) Insurance expense for the year ended 31 December 2024

Insurance expense = Opening prepaid + Payments during year - Closing prepaid

= $2 200 + ($8 400 + $3 600) - $3 900

= $2 200 + $12 000 - $3 900 = $10 300 [1][1]

This represents the insurance cover actually consumed during the calendar year 2024.

(c) Insurance Account for the year ended 31 December 2024

Correct T-account format with all dates. [1][1]

The debit side shows the opening prepaid balance brought forward and the two payments made during the year. The credit side transfers the year's expense to the income statement and carries forward the prepaid amount to the next year.

(d) Why insurance prepaid is a current asset

The prepayment is a current asset because it represents a future economic benefit - the business has already paid for insurance cover that it will receive in the next accounting period. [1] The benefit will be consumed within 12 months, making it a current (rather than non-current) asset. [1]

(e) Effect if prepayment were not recorded

(i) The insurance expense would be overstated by $3 900. The full amount of cash paid ($14 200) would be charged to the income statement instead of the correct expense ($10 300). [1][1]

(ii) The profit for the year would be understated by $3 900. Higher expenses reduce the profit figure, giving a misleading view of business performance. [1][1]