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CMA Foundation · Fundamentals of Financial and Cost Accounting · Adjustment Entries and Rectification of Errors

Gupta & Co. paid an insurance premium of Rs 36,000 on 1 October 2024 for 12 months. Books are closed on 31 March every year. What is the prepaid insurance on 31 March 2025 and the insurance expense for the year ended 31 March 2025 arising from this premium?

Prepaid insurance is Rs 18,000 and the expense is Rs 18,000. The Rs 36,000 premium covers 12 months at Rs 3,000 per month; six months, October to March, have expired, and the remaining six months are carried forward as a current asset.

  1. APrepaid Rs 18,000; expense Rs 18,000Correct
  2. BPrepaid Rs 24,000; expense Rs 12,000
  3. CPrepaid Rs 12,000; expense Rs 24,000
  4. DPrepaid Rs 30,000; expense Rs 6,000

Explanation

The premium is Rs 3,000 per month. Coverage used from October to March is 6 months = Rs 18,000 expense. The remaining 6 months = Rs 18,000 is prepaid. Option 2 wrongly treats only 4 months as used.

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