How much has DEF Co. paid for insurance in the current year after one year has elapsed?

How much has DEF Co. paid for insurance in the current year after one year has elapsed?

• A. $15,000
• B. $10,000
• C. $5,000
• D. $0

Answer: (D)

The key idea is how prepaid expenses work: insurance paid in advance is recorded as a prepaid asset, and the cost is recognized as expense over the period it covers. If the policy for the current year was paid for in a prior year, then there is no cash outlay for insurance in the current year. The cost of that current year’s coverage has already been paid, but when you look at the current year’s activities, you’re observing the use of that already-paid benefit, not a new payment. So after one year has elapsed, the amount paid during the current year is zero.

The key idea is how prepaid expenses work: insurance paid in advance is recorded as a prepaid asset, and the cost is recognized as expense over the period it covers. If the policy for the current year was paid for in a prior year, then there is no cash outlay for insurance in the current year. The cost of that current year’s coverage has already been paid, but when you look at the current year’s activities, you’re observing the use of that already-paid benefit, not a new payment. So after one year has elapsed, the amount paid during the current year is zero.