If DEF Co. pays $15,000 for a 3-year insurance premium, how much insurance expense is incurred after one year?

When DEF Co. pays $15,000 for a 3-year insurance premium, the payment is for future insurance coverage, which means it should be recorded as a prepaid expense initially. Since the insurance policy covers a total of three years, this means the cost of the premium needs to be allocated over that time period.

To calculate the annual insurance expense, you would take the total premium paid ($15,000) and divide it by the number of years the policy covers (3 years). This results in an annual insurance expense of $5,000.

After one year, DEF Co. would recognize $5,000 as an insurance expense. This amount reflects the portion of the prepaid insurance that has been consumed or used up in that year, accurately matching the expense to the time period in which the coverage was applicable. Thus, after one year, the expense incurred amounts to $5,000.