CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Cycle
Rohan Mehta's books show insurance premium paid during the year ended 31 March of Rs 24,000. This includes Rs 6,000 paid for the period 1 April of next year to 30 June of next year. Opening prepaid insurance was Rs 4,000. What amount is charged to the Profit and Loss Account for insurance?
The insurance charge is Rs 22,000. Add the opening prepaid of Rs 4,000 to the Rs 24,000 paid, because it relates to this year, and deduct the closing prepaid of Rs 6,000, because it relates to next year. The result is Rs 22,000.
- ARs 18,000
- BRs 22,000Correct
- CRs 26,000
- DRs 14,000
Explanation
Expense = premium paid + opening prepaid - closing prepaid = 24,000 + 4,000 - 6,000 = Rs 22,000. Rs 18,000 results from ignoring the opening prepaid and only deducting the closing one. Rs 26,000 results from adding the closing prepaid instead of deducting it.
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