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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 ended 31 December 20X5. On 1 October 20X5 it paid $6,000 for insurance covering the 12 months to 30 September 20X6. How should this be treated in the financial statements for the year ended 31 December 20X5?

The charge is $1,500 for three months of cover in the year, and $4,500 for the remaining nine months is carried forward as a prepayment in current assets, because it relates to the next accounting period.

  1. AStatement of profit or loss charge $6,000; no prepayment
  2. BStatement of profit or loss charge $1,500; prepayment $4,500 in current assetsCorrect
  3. CStatement of profit or loss charge $4,500; prepayment $1,500 in current assets
  4. DStatement of profit or loss charge $1,500; accrual $4,500 in current liabilities

Explanation

Only 3 months (Oct-Dec) relate to 20X5: $6,000 x 3/12 = $1,500 expense. The remaining 9 months, $4,500, is a prepayment, a current asset. Option C reverses the months, charging 9 months instead of 3.

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