C213 On May 1, 2011, a company using accrual accounting purchased equipment costing $500,0, Thesis of Business Accounting

Download C213 On May 1, 2011, a company using accrual accounting purchased equipment costing $500,0 and more Thesis Business Accounting in PDF only on Docsity! C213 On May 1, 2011, a company using accrual accounting purchased equipment costing $500,000. It expects the equipment to have a useful life of five years. At the time of purchase, the company also purchased a one- year insurance policy on this equipment, which cost $6,000. How much insurance expense should the company have recognized for the year ending in 2011? Insurance Expense Calculation When a company using accrual accounting purchases an insurance policy, the cost of the policy is initially recorded as a prepaid expense, which is an asset on the balance sheet. As time passes and the insurance coverage is used, the company recognizes the expense in its income statement. Steps to Calculate Insurance Expense 1. Determine the Coverage Period: Identify the time period that the insurance policy covers. 2. Allocate the Cost Over the Coverage Period: Divide the total cost of the insurance policy by the number of months it covers to find the monthly expense. 3. Recognize the Expense: Multiply the monthly expense by the number of months in the year that the policy was in effect. Application to the Given Scenario The company purchased a one-year insurance policy costing $6,000 on May 1, 2011. The coverage period is from May 1, 2011, to April 30, 2012.  Monthly Insurance Expense: [ \frac{$6,000}{12 \text{ months}} = $500 \text{ per month} ]  Months of Coverage in 2011: From May 1 to December 31, there are 8 months.  Insurance Expense for 2011: [ $500 \times 8 \text{ months} = $4,000 ] Therefore, the company should have recognized an insurance expense of $4,000 for the year ending in 2011. Summary Table Description Calculation Amount Total Cost of Insurance - $6,000 Monthly Insurance Expense $6,000 / 12 months $500 Coverage Period in 2011 May 1 - Dec 31 8 months Insurance Expense for 2011 $500 x 8 months $4,000 The $4,000 is the amount that should be recognized as an insurance expense on the income statement for the year ending in 2011. The remaining $2,000