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On April 1, a company paid the $3,900 premium on a three-year insurance policy with benefits beginning on that date. What amount of the insurance expense will be reported on the annual income statement for the year ended December 31?

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Answer:

$975

Explanation:

Date of purchase of insurance premium is April 1

Cost = $3,900

Period of cover = 3 years

Annual amortization = $3,900/3

                                  = $1,300

Since the premium was purchased on April 1, it would have been amortized for 9 months (between April and December).

Therefore amount to be reported

= (9/12) × $1,300

= $975

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