Your company pays $18,000 in advance for 3 years of insurance. After one year, how much insurance expense has been incurred?

When a company pays in advance for an expense such as insurance, it initially records the payment as an asset on its balance sheet, specifically as a prepaid insurance asset. In this case, the company pays $18,000 for 3 years of insurance coverage, which means the cost is recognized as an asset because the insurance coverage isn't consumed immediately.

To determine the insurance expense incurred after one year, we need to calculate how much of that prepaid asset has been used up during that time frame. Since the insurance payment covers 3 years, we can divide the total prepaid amount by the number of years to find the yearly expense:

$18,000 divided by 3 years equals $6,000 per year.

After one year, the company recognizes $6,000 as an insurance expense. This is because, for each year of the insurance coverage, an equal portion of the prepaid amount is recognized as an expense. Therefore, the correct assessment of the insurance expense incurred after one year is indeed $6,000.