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ACCA Applied Knowledge · Financial Accounting · Accrued expenses (accruals), prepaid expenses (prepayments), accrued income and deferred income

At 1 January 20X5 Pell Co had insurance prepaid of $1,800 and at 31 December 20X5 had insurance prepaid of $2,100. Insurance paid during 20X5 was $7,500. What is the insurance expense in the statement of profit or loss for 20X5?

The insurance expense is $7,200. Opening prepayment of $1,800 plus cash paid of $7,500 less the closing prepayment of $2,100 gives the cost relating to 20X5. A prepayment at the end reduces the expense because it relates to next year.

  1. A$7,200Correct
  2. B$7,800
  3. C$11,400
  4. D$3,600

Explanation

Expense = opening prepayment + cash paid - closing prepayment = 1,800 + 7,500 - 2,100 = $7,200. $7,800 results from adding the increase in prepayment instead of deducting it (7,500 + 300). Check: the ledger account balances with expense $7,200.

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