A company with a 31 December year end pays insurance annually in advance on 1 October. It paid $6,000 on 1 October 20X4 and $7,200 on 1 October 20X5. What is the insurance expense for the year ended 31 December 20X5?

Correct answer: B) $6,300

Explanation

January to September 20X5 is covered by the 20X4 payment: $6,000 x 9/12 = $4,500. October to December 20X5 is covered by the 20X5 payment: $7,200 x 3/12 = $1,800. Expense = $4,500 + $1,800 = $6,300, and the prepayment at 31 December is $7,200 x 9/12 = $5,400. Applying the fractions the wrong way round gives $6,900.