Question

On May 1, a two-year insurance policy was purchased for $18,000 with coverage to begin immediately. What is the amount of insurance expense that would appear on the company's income statement for the first year ended December 31

Answer 1

An insurance expense amounting to around $6000 would be shown in the company's balance sheet, at the end of the year on December 31.

What is insurance expense?

Insurance expense refers to as an expense borne by the insured for the purpose of securing a cover against the happening of the event against which such policy has been taken.

In the given example, the insurance policy has been taken for two years for an amount of $18000 on May 1. The financial year ends on December 31. The computation for insurance expense in this year will be;

$\rm Insurance\ Expense= Monthly\ Expense\ x\ No.\ of\ Months\\\\\rm Insurance\ Expense= \dfrac{\ 18000}{24} x\ 8\\\\\rm Insurance\ Expense= \ 750\ x\ 8$

Calculating further, the insurance expense for the year is calculated as $6000.

Hence, it can be stated that the insurance expense for a policy purchased on May 1 will be $6000 as on December 31.

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