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

Kestrel Co has a year end of 31 December. On 1 October 20X4 it paid $12,000 for insurance covering the 12 months to 30 September 20X5. What amount is shown as a prepayment in the statement of financial position at 31 December 20X4?

The prepayment is $9,000. Nine of the twelve months of insurance cover relate to the following year, so $12,000 multiplied by 9/12 is carried forward as a current asset, while only $3,000 is charged to profit or loss.

  1. A$3,000
  2. B$9,000Correct
  3. C$12,000
  4. D$6,000

Explanation

Nine months of cover (January to September 20X5) fall after the year end. $12,000 x 9/12 = $9,000 is the prepayment. $3,000 is the expense for the current year (3 months), which is the wrong portion.

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