A trader paid insurance premium of N1,350 for 15 months ended 31st March 1991. He prepares to 31st December. The amount carried in the Balance Sheet is clas...

Answer Details

The insurance premium of N1,350 was paid for 15 months, which means that the insurance coverage is for the period from 1st January 1990 to 31st March 1991. Since the trader is preparing the Balance Sheet as of 31st December, which is before the end of the insurance coverage period, the portion of the insurance premium relating to the period from 1st January to 31st December (i.e., 12 months) should be treated as a "prepaid expense". This means that the amount paid for the 12 months should be recorded as an asset on the Balance Sheet. Therefore, the amount carried in the Balance Sheet should be classified as a "current asset". This is because it is an asset that is expected to be used up or converted to cash within a year. It is important to note that the remaining 3 months of insurance coverage (i.e., from 1st January to 31st March 1991) should be expensed in the Profit and Loss account for the year ending 31st December 1990 since they relate to the following year.